Here are some investment avenues where you can park your money for the short-term
There are many kinds of investors, some looking for growth, some investing to reduce tax, some investing to derive regular income, and some looking for avenues that are short-term. Here we focus on those investors who look at capital preservation, to invest for a short term that is safe and rewarding. Well, investors have a few options to choose from, and let's discuss them.
One way is to invest in a fixed deposit (FD) at the bank. This offers a better return over savings accounts. FDs are a safe investment and if the investor is looking for a guaranteed return then there are no other better options than this. Deposits with a bank are insured up to Rs 5 lakh by the Deposit Insurance and Credit Guarantee Scheme of India (DICGC), which is a subsidiary of RBI. The insurance works as a protection for the investor in case the bank fails to repay. However, such cases have been very rare.
Interest earned on fixed deposits is added to the taxable income and taxed according to the applicable slab. Investors in higher tax slabs will therefore have higher tax implications (30 per cent) and accordingly reduced post-tax returns.
The other and more tax-efficient option to park your short-term money could be debt mutual funds. Returns from mutual funds are taxed only when they are realised, that is at the time of redemption. Further, if you hold an investment in a debt fund for more than 3 years, the gains are taxed at 20 per cent after providing the benefit of indexation. Indexation helps adjusting the cost of purchase for inflation, thereby reducing taxable gains.
different needs and the investor can choose one accordingly. If you plan to park your money for a few weeks to a few months, go for a good liquid fund. If you are parking the money for up to a year or a little beyond that, ultra-short duration funds are a good bet. If you are parking the money for a higher time period, choose a short-duration fund.
But one must note that debt funds do not guarantee returns or preservation of capital like fixed deposits. While choosing them, aim for a high-quality portfolio. A debt fund with low-quality bonds may generate higher returns but it also runs the risk of default.
Watch this video to know how to choose a debt fund.