7 MinsSep 07, 2020
Investments can be classified as short-term and long-term – depending on the time horizon for your goal. Typically, a short-term goal would be one that is up to three years away. Some instances of a short-term goal could be paying for your child’s school fees within one year or making a down payment for purchasing a house within three years. In both cases, you know exactly when you need the money and how much. Hence, you must plan your investments in such a manner that the funds are available when you need them.
Here are investment avenues every individual with a short-term investment time horizon may consider:
Debt Mutual Funds – Certain sub-categories of debt mutual funds can help you address your short-term needs and ensure liquidity. One of the objectives of a debt mutual fund scheme is to earn a steady and regular income for investors. That said, the investment objective, risk, and the returns vary on the types of debt mutual scheme you choose.
For short-term needs, the six categories of debt mutual funds that you may consider are:
1. Overnight Fund – For very short-term horizon, say a day, to a week, to a fortnight, to a month, this sub-category of debt mutual funds can be considered. According to SEBI’s classification norms, an Overnight Fund is mandated to invest in overnight securities that have a maturity of 1 day. These are typically money market instruments viz. Treasury bill (T-Bills), Tri-Party Repos (TREPS), Reverse Repos, etc.
An Overnight Fund commands a very low risk-very low return investment proposition.
2. Liquid Fund – A Liquid Fund is mandated to invest in debt and money market securities with a maturity of up to 91 days. For instance, money market instruments such as Certificate of Deposits (CDs), Commercial Papers, Term Deposits, Call Money, T-Bills and so on.
A Liquid Fund entails low risk; it is placed at the lower end of the risk-return spectrum vis-à-vis other debt mutual funds. A Liquid Fund is suitable if you have a low-risk appetite, prefer safety and liquidity over returns, and have an investment time horizon of 1 month to 3 months, or a little more.
3. Ultra-Short Duration Fund – This sub-category of debt mutual fund invests in instruments with higher duration as compared to liquid funds. An Ultra-Short Duration Fund is mandated to invest in Debt & Money Market instruments with an average duration of between 3 months to 6 months.
When compared to a Liquid Fund, the Ultra-Short Duration Fund exposes you to slightly higher risk, since the underlying portfolio of the fund is in relative higher maturity debt papers. That being said, the return potential is a tad better than a Liquid Fund.
If you have an investment time horizon of anywhere between 3 to 6 months, or slightly more; an Ultra-Short Duration Fund may be considered.
4. Low Duration Fund – This is a variant of the short-term debt fund that invests in debt and money market instruments such that the average duration of the portfolio is between 6 months to 12 months. It holds slightly longer maturity debt papers in comparison to an Ultra-Short Duration Fund.
Thus on the risk-return spectrum, a Low Duration Fund is placed a little above an Ultra-Short Duration Fund; because the slightly higher maturity increases the duration risk to its portfolio as well. Hence, if you have an investment time horizon of up to a year, you should consider a Low Duration Fund.
5. Money Market Fund – As the name suggests, a Money Market Fund invests in Money Market instruments having the maturity of up to 1 year. The instruments include Certificate of Deposits (CDs), Commercial Papers, Term Deposits, Call Money, Treasury Bills and so on. Thus, on the risk-return spectrum, indicatively a Money Market Fund is placed above a low duration fund.
If you have an investment time horizon of up to a year, this sub-category of debt mutual funds may be considered. These funds have the potential to give superior returns to an FD.
6. Short Duration Fund – These debt funds invest in debt and money market instruments such that the average duration of the portfolio is between 1 and 3 years.
Compared to a Low Duration Fund, the maturity profile of the debt portfolio is longer while it invests in a variety of debt papers: corporate bonds/debentures, government securities, and money market instruments.
Thus, on the risk-return spectrum, a Short Duration Fund is placed two levels above a low duration fund. It is suitable if you have a low-to-moderate risk profile.
Do note that investments in debt mutual funds are not absolutely risk-free. Debt mutual funds typically attract interest rate risk, credit risk (also known as default risk), portfolio concentration risk, and liquidity risk. The returns earned on a debt mutual fund are market-linked. The performance of the funds depends on the quality of debt papers and money market instruments they hold in the portfolio. Hence, scheme selection plays a pivotal role.
Axis Bank offers a choice of top debt mutual funds. Visit the mutual funds section on our website to select one that meets your requirements.
Bank Fixed Deposit – A bank FD earns an assured rate of interest, addresses liquidity needs, helps in contingency planning, and achieving short-term financial goals. From an asset allocation and diversification standpoint, you may hold some money in fixed deposits.
At Axis Bank, you can book your bank FD with a minimum of Rs 5,000 for a flexible tenure starting from a minimum of 7 days to a maximum of 10 years. This can be done online. Axis Bank offers an attractive rate of interest on bank FD to enable wealth creation.
[Also Read: New to investing? Here’s how you can formulate your strategy]
To know how much interest your FD will fetch you, use Axis Bank’s Fixed Deposit calculator. It is an online FD calculator that helps you determine the maturity amount by applying compound interest on a monthly, quarterly basis and reinvestment payout of interest .
In addition to regular bank FDs, Axis Bank also offers a couple of other variants viz. Auto Fixed Deposit; and Fixed Deposit Plus.
Choose your options suitably - whether it is bank FD or debt mutual funds to park your short-term money. Whichever you choose, be cognizant of the tax implications.
Taxation on debt funds and FDs
The interest earned on FDs is added to your income and taxed as per your income-tax slab. There is a Tax Deducted at Source (TDS), which the bank will deduct if the interest is more than Rs 40,000. For senior citizens, this limit is at Rs 50,000.
If you are in a higher bracket, you will have to pay the additional tax, i.e., over and above the TDS rate, while filing your income tax returns. You can also avoid paying TDS by submitting Form 15G or Form 15H, as per eligibility.
Alternatively, you can invest in a Tax Saver Deposit for saving taxes u/s 80C of Income Tax Act. Tax Saver Deposits involve a fixed tenure of 5 years and cannot be liquidated prematurely. As compared to FDs, you may be able to save on taxes, to some extent, by investing in some debt mutual funds. In the case of the latter, the taxation depends on how long you stay invested. If you sell your debt funds within three years of investing, the gains are added to your income, and you are charged short-term capital gains tax as per your income tax slab rate.
If you sell your units after three years, you will have to pay long-term capital gains on the profit. However, in this case, you can take the benefit of indexation. This means when you sell, the rate of inflation is added to your purchase price and the gains are calculated based on the higher purchase price. You effectively end up paying tax on a lower amount.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision