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Making the Most of Idle Cash

I often end up with idle money in my savings bank account. Are products like debt short term, ultra short term etc better than putting money in savings accounts? —S. Kodandapani

I often end up with idle money in my savings bank account. The idle time ranges from 15 days to two to three months. I tried comparing the returns of some of the floating funds with savings bank returns. But being bad at numbers, I couldn't decipher them. Are such products (debt short term, ultra short term etc) better than putting money in savings accounts?
—S. Kodandapani

Ultra short term debt or liquid funds are most suited for your requirements. Popularly known as cash funds, they aim to preserve the principal and earn a modest return. Since they came into existence, this category has provided a little over the short-term bank deposit. Though returns are not guaranteed like in a bank deposit, there is little risk of not earning interest as these funds invest in very short-term investments where the risk is negligible.

These funds are a good option for investors looking at earning a little extra. As a category, these funds are the least volatile of all funds.

At present, cash funds' one-year trailing return is an average 4.61 per cent - about 1.1 per cent more than what savings accounts offer. This rate is even better than a six-month SBI fixed deposit rate.

However, cash funds may not be as liquid as a plain vanilla bank account, where you can withdraw your money within minutes from any ATM or bank branch. Cash funds redemption works on T+1 basis, wherein you receive the money on the next day of submission of the redemption request.

You could also opt for Electronic Clearing System, and your redemption amount will be directly credited to your bank account the very next day (provided your fund house has a tie-up with the bank in which you have an account).

Most cash funds don't charge any entry or exit load. The minimum investment here could start from as low as Rs 1,000 to as high as Rs 1 lakh. But for meaningful returns in absolute rupee terms, investment here makes sense only if you have a cash position of over Rs 1 lakh. For big investors, cash funds are a better option than short-term bank deposits and savings accounts.

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