Saving money is a practice we follow even when we don't begin earning. But after we do, our approach is to grow the money we save. Be it going on holiday to the Maldives, or buying your favourite car we always have to wait and save consciously to fulfil our micro-goals in life.
But being in the easy spend era that we are, with digital transactions at our fingertips, saving money from unnecessary spending has become critical. So, the elephant in the room remains "How do I save my saved money?" The answer is simple, make low-risk and highly liquid investments. This blog is a guide to investments that will help you save your saved money!
The goal in short-term investments would typically be capital protection rather than wealth creation. These investments can at most be thought of as a measure to beat inflation. Investing for double-digit returns in the short term can put one's portfolio at tremendous unwanted risk.
Once we have our goals fixed, the next obvious step is deciding how long one intends to stay invested. Another aspect that must be considered in a short-term investment is liquidity. Any investment held for less than three years can be considered a short-term investment.
Now that we're clear with the investments' goals and the time duration let us see some of the investment instruments and associated time duration and returns.
For a GenZ investor, FD may be counted among brethren of rice box investments. However, for short-duration investing, FDs are an excellent way of protecting one's capital while earning returns similar to a savings account.
Tenure - Available for periods as less as seven days.
Interest Rates - From 2.5% p.a. (for ultra short duration) to 7% p.a.
Liquidity - Most banks allow investors to withdraw the amount deposited before maturity. However, the terms of the same may differ from bank to bank and must be studied carefully before going ahead.
Debt instruments backed by the government are a great way to earn decent interest rates with added peace of mind. Investors can majorly buy these in two ways:
1) Liquid Debt Funds - These low-risk mutual funds are offered, keeping liquidity as one of the primary goals. These funds charge minuscule exit loads to the investors, even exiting the very next day of investment.
2) Short-duration debt instruments - Investors can buy short-duration debt instruments like T-bills and SDLs directly via RBI retail direct website. The T- bills are available for as low as 91 days. Although these bonds come with maturity periods that range in decades, retail individuals can trade them in the secondary market offered by RBI. The latter method, however, is linked to the market, and results in a slight increase in risk profile.
Tenure - Liquid funds, as the name suggests, can be withdrawn right from the next day. On the other hand, debt instruments come with the lowest maturity period of 91 days (T-bills) and can be traded after a day (T+1 settlement).
Interest rates - Vary from 4% p.a. (liquid fund) to 7.83% p.a. (10 yr SDLs)
Similar to FDs, RDs are investing options offered by banks that can be thought to be analogous to SIPs in mutual funds. They offer similar interest rates and withdrawal policies as FDs.
Like FDs, this scheme offered by India Post is very popular in rural areas due to greater coverage of post offices throughout the country. These also provide certain tax exemptions to the investors.
Tenure - Available for 1,2,3 and 5 years. It can also be extended in certain cases.
Interest rates - 5.5%(1-year deposits) to 6.7%(5-year deposits)
Withdrawal - 6-month lock-in periods. Pre-mature withdrawals would attract interest per savings bank interest rates.
An investor with a slightly greater risk appetite may opt for hybrid mutual funds or equity funds that invest in large-cap stocks. Hybrid funds allow the investors to earn a decent interest rate while hedging against the volatility by investing in debt. Although funds involving a proportion of equity have outperformed debt instruments, they often require the investors to remain invested for a longer period to ensure the same.
Tenure - Recommended 1-3 years.
Returns - 13-14% p.a. (Large Cap Stocks) and varies according to equity allocation in hybrid funds (up to 30% p.a.)
Withdrawal - Most funds allow withdrawal but may charge a small exit load.
Although a riskier alternative, a seasoned investor might prefer investing in hand-picked stocks for a short-term investment. This saves one of the expense ratios and gives greater take-home returns. However, this mode of investment is one of the riskiest ones as it doesn't diversify the available capital among multiple companies, and the money may even come under threat.
Tenure - depends on factors like investor's risk appetite, company performance, and sectoral sentiment. However, one must consider remaining invested for at least a year to reap the tax benefits.
Returns - Wrong question! Predicting stock returns is one of the biggest lies told to mankind.
Withdrawals - Depending on T+2 or T+1 settlement for a particular stock, one can sell the stocks purchased through market order after a day or two if not sold on the same day. However, there may be some brokerage charge on the transaction.
If you are still here, it means you have got a grasp that n that case, you can tell no instrument deletes the element of risk, adds the component of returns, and keeps the entire capital liquid simultaneously. Well, to be precise, there wasn't until Spenny Wise took matters into its hands.
Tenure - No maturity period. The investment gets compounded on an annual basis.
Returns - 10% p.a.
Withdrawals - You can withdraw anytime after seven days, and the accrued interest is fully credited without penalty.
We hope the blog will help you invest better.
We'll be back with another blog tomorrow! Till then invest safely!!