Parking money for the very short term (3-4 months) can be confusing. Each instrument where you can invest short term money has its advantages.
One option is to keep it in the savings bank account. It would earn an average of 3%. The interest income up to ₹10,000 is available for income tax deduction under Section 80TTA.
You can also park the money in a fixed deposit (FD). State Bank of India, the country’s largest bank, offers 3.90% rate for FDs between 46 days to 179 days.
An alternative to FD is sweep-in, sweep-out FD. In them, the bank offers interest based on the duration for which you have parked the money with it.
Liquid fund is also an option, but the returns are on par with FDs — the average returns of liquid funds are 3.65%, according to data from Value Research. For investments below one year, debt funds are not tax-efficient if you plan to withdraw the entire amount.
Which option then works the best for an individual looking to park money for a short period? “If the amount is significant, say ₹5 lakh or more, the better option is to park the money in ultra-short-term mutual funds,” said Arnav Pandya, founder of Moneyeduschool, an Ahmedabad-based financial literacy initiative.
Ultra-short duration funds maintain portfolio maturity of 3-6 months. The average returns of ultra-short duration funds are 5.35% in the past one year. “For significant amounts, 2-2.5% returns will make a difference,” said Pandya.
Assume a person wants to invest ₹5 lakh for three months. At 5.35%, the returns would be around ₹6,688. In an FD at 3.5%, the returns would be around ₹4,375. The difference is ₹2,313.
In a debt fund, the individual won’t need to bother about the time of withdrawal. In an FD, the bank could penalise the depositor for pre-mature withdrawal. So, if there is no clarity on the withdrawal date, debt funds work out to be a better option.
If the fund is not significant, investors can keep the money in the savings account. The interest earned will be tax-free up to ₹10,000.
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