November 9, 2011 10:32 am
What is the best and safe option to park cash for short term other than fixed deposit?
How about name of some of these funds?
I mean please share example of these funds.
I ditto justgrowmymoney.
I have opted for the liquid MF option & it is really proving good to me.
Normally bank will give you inetrest of 4% only ( now though teh rates are revised, they are as max as 6%), however in liquid fund, it would be as low as 8%.Further no entry & exit load & moreover you can take out the cash within1 year ( min is 15 days I believ, depending upon the type of liquid fund you are choosing).
Hope that helps.
AaamInvestor – It helps if you can let us know the duration as well. I am assuming this duration is less than 1 year.
You can invest in Short Term Debt fund/Treasury funds which yield about 8.5% as on date. There is no entry load/no exit load ==> You can stay invested for as less as 1 day. Redemption done before 2 PM will mean the funds are available in your account the next morning.
This is the best avenue to park cash for short term – even better than your savings account.
My recommendation: Use the dividend payout option if you are in the 30% tax bracket. Then if you dont need the dividend reinvest it back.
Reason: Dividend is taxed at 25% while if you let this grow and redeeem you will need to pay 30% tax!
Thank you. I really appreciate your response. Yes, I am looking for less than one year. I had one question regarding short term debt funds. Do they carry risk of capital loss? I mean if I invest one lac, is there any risk that at any point during the invested period, value of my investment would go below 1 lac.
Thank you for your response again.
Aaminvestor – The risk of capital loss is ALWAYS PRESENT in any non government debt instrument* including Bank FDs+++. The funds running the show definitely do their due diligence to make sure the invested money is secure. The portfolio of any scheme will show their holdings and the rating of each of those papers. The holdings are never concentrated in one instrument. Thus even if one or two of the commercial papers they hold default, since the scheme is well diversified, the overall impact would not be very high. This may slighly impact the yield. So instead of 8% you may get lower, lets say, 6%. Losses are very rare but cannot be ruled out.
*Note: Govt securities are virtually risk free as Govt can print unlimited money – loss of value of currency is always there – but the govt will generally not default!
+++ Bank FDs are secure only to the extent of 1 Lac for every individual account. Thus if you have 10 Lacs of FD in a bank (EVEN if they are 20 different FDs) and then the bank goes bankrupt you will only get the first 1 Lac of your deposit.If there is still money available you may get it. Assuming Bank FDs are risk free is not correct. However due to the stringent norms in India a bank failing (like in the west) is a rarity. As soon as a bank becomes sick RBI will ensure it is merged with some other entity so it sustains.
Just to correct Justgrowmymoney, if you choose a short term debt fund, the DDT is 14%..
This is a great time to invest in these funds.. Please go ahead for less than 1 year.
Abhishek, Moat Wealth Advisors
wow Abhishek, I did not know DDT on Short term debt funds is 14%. Thanks!
That makes these funds even more attractive than FDs at 10% (when taxed at 30%).
Yes. DDT in all Debt/Debt Oriented Funds except the Liquid funds is 14%.
What you mean short term debt fund and treasury fund. As i am new to these terms . Please help me to understand those concepts
Dear Ashwin, Short term debt funds are those funds where the underlying assets are debt papers of very short term maturity. In case of treasure funds, the underkying assetsd are the treasury papers or money market papers.
As a Debt primer for everyone:
Ultra short term funds = Maturity upto 91 days
Short term debt funds = Maturity between 91 days and 364 days
Medium term funds: 1 year – 10 years maturity
Long term funds = beyond 10 years maturity
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