Best Places To Park Your Short Term Money

We put in a lot of effort at work to earn money, and thus, it’s only natural to be able to access that money at a moment’s notice. 

We make long-term investments to achieve long-term goals, but what about your immediate financial needs? This blog will explore the best ways of investing your extra cash so that you can earn some extra money! 

Liquid Investments – Overview

Liquid investments are financial assets that can be quickly and readily converted into cash. They are integral to financial independence as they allow you to respond to unforeseen events without damaging your long-term financial investments. 

A popular rule of thumb is that an individual should have a contingency reserve in the form of liquid money equal to six times their monthly expenses. This reserve allows the individual to be secure during financial emergencies and helps mitigate financial risks. 

Investment Avenues

In the universe of finance, there are various options where you can park your liquid money and earn some return on it. Some of them are mentioned below.

Banks Savings Account 

It is regarded as the easiest and safest place to park your short-term funds. Investing money into this vehicle can yield upto 4-5% annual nominal return (dependent on bank rates). It is appropriate for investors who prioritize liquidity as it is considered equivalent to hard cash. 

Savings accounts are also extremely safe due to the DICGC (Deposit Insurance and Credit Guarantee Corporation) insurance of upto 5 lakhs. New investors with unstable incomes are drawn to this investment opportunity due to its high liquidity and safety. 

Bank Name	Interest Rate
HDFC Bank Savings Account	Up to 3.5%
Axis Bank Savings Account	Up to 3.5%
Kotak Mahindra Bank Savings Account	Up to 4%
State Bank of India Savings Account	Up to 2.7%
Punjab National Bank Savings Account	Up to 3%

Bank Fixed Deposits 

If you allow a lock-in period, bank-fixed deposits are a good alternative to savings accounts. Bank FDs often yield returns 2-3% higher than bank savings accounts. This higher interest rate comes at the cost of a lock-in period. A prepayment penalty can be enforced if you withdraw the funds from this investment during the tenure of the FD. 

The interest rates offered depend on the length of the investment. Generally, the longer the term, the higher the rate. 

Bank Name	Interest Rate
HDFC Bank Savings Account	3% – 7%
Axis Bank Savings Account	3% – 7.4%
Kotak Mahindra Bank Savings Account	2.75% – 7.4%
State Bank of India Savings Account	3.5% – 6.25%
Punjab National Bank Savings Account	3.5% – 6.25%

Short-Term Debt Funds 

A “Debt Fund” is a mutual fund based on the debt asset class. Typically, your money is invested in fixed-income instruments like short-term bonds, money market securities, and debentures. Mutual funds in the debt category typically give better returns than FDs. They are appropriate for investors who want to invest their money for a period of six months to one year. However, since they are traded on the market, debt funds experience significant volatility, but the risk is lower than a corresponding equity fund.

Scheme Name	2020	2021	2022	2023
ICICI Pru Short-Term Gr	10.65%	3.88%	4.66%	7.40%
HDFC Short-Term Debt Gr	10.96%	3.86%	3.53%	7.14%
UTI Short Duration Fund Dir Gr	10.97%	9.04%	4.41%	7.59%
Nippon India Short-Term Gr	9.48%	4.42%	3.20%	6.82%
ABSL Short Term Gr Reg	11.06%	3.84%	4.19%	6.90%

Arbitrage Funds 

Arbitrage funds are a type of hybrid mutual fund that uses futures, a form of derivative investment, to generate returns similar to debt funds. This is how it works: the fund manager buys shares using your money and sells them later. The difference in prices (known as the spread) between the stock and its future contract creates a return. On average, these funds are able to generate returns between 4% and 8% annually.

Scheme Name	2020	2021	2022	2023
Kotak Equity Arbitrage Gr	4.33%	3.96%	3.42%	7.38%
Edelweiss Arbitrage Gr	5.25%	4.58%	5.11%	7.89%
Axis Arbitrage Gr	4.91%	4.61%	4.95%	7.68%
HDFC Arbitrage Gr	4.30%	4.17%	4.73%	7.78%
Invesco India Arbitrage Gr	5.02%	4.15%	5.85%	8.07%

Liquid Mutual Fund 

Liquid mutual funds invest in treasury bills, corporate papers, and other money market instruments. These assets are called money market securities since they have zero to low risk and a maximum maturity of one year. With a return of 4% to 7%, the liquid fund provides a marginally better yield than a bank savings account. Since liquid funds are linked to market risk, investors may experience portfolio volatility during unusual circumstances; hence, returns on these products cannot be guaranteed.

Scheme Name	2020	2021	2022	2023
Axis Liquid Gr	4.33%	3.36%	4.95%	7.13%
ABSL Liquid Retail Gr	4.40%	3.38%	4.95%	7.19%
ICICI Pru Liquid Gr	4.39%	3.35%	4.85%	7.08%
HDFC Liquid Gr	4.11%	3.21%	4.77%	6.95%
Edelweiss Liquid Reg Gr	4.12%	3.23%	4.66%	6.85%

Read Also: How to find and identify undervalued stocks

Conclusion

Investing your liquid money is extremely important. However, many factors need to be considered before choosing one investment vehicle. Therefore, it is advisable to consult a financial advisor before making such decisions. 

Frequently Asked Questions (FAQs)