If an investor wants to invest his money for a very short period (3-4 months) without risk or with little risk, then he has three major options. First savings bank account, second fixed deposit and third debt fund. Each of these options has its benefits, so the investor may have trouble choosing one of these.
saving account
Talking about a savings bank account, it offers an average interest rate of 3 percent. Under Section 80 TTA of the Income Tax Act, interest income up to Rs 10,000 comes under the income tax exemption. According to SEBI Registered Investment Advisor Jitendra Solanki, liquidity is the biggest benefit to a customer in a savings bank account. Here customers can withdraw money anytime, anytime through bank ATM or internet banking. Here no penalty is also applicable on such withdrawals. But the interest is usually much lower than FDs and debt funds.
Fixed deposit
You can also deposit your money in FD for a very short period. State Bank of India, the country’s largest bank, is offering interest rate of 3.90% on FDs maturing from 46 days to 179 days. There is also an option sweep-in, sweep-out FD. In this, the bank offers interest based on the period for which you keep the money. According to Solanki, one drawback here is about liquidity. If you withdraw money from FD when you need cash immediately, then you may have to pay a penalty.
Debt fund
Debt funds are also an option for short-term investment. According to Manikaran Singhal, founder of Good Moneying, one should invest in a debt fund for a short period, then invest in a liquid fund or ultra short term fund. He told that if you are planning to withdraw all the amount in less than one year of investment, then debt funds are not tax efficient. According to Manikaran, one can also invest in arbitrage funds for a year.
Invest half-and-half money in FD and debt funds
Solanki believes that if one wants to park his money for a period of three to four months, he can invest half of his money in FD and half in debt funds. And they say that there is a possibility of higher returns in debt funds. As far as liquidity is concerned, the money comes into the account on the next day of redemption request in the debt fund.
