Short Term FD — is it worth it?

POSTED BY Ram Mohan ON April 12, 2012 2:28 pm COMMENTS (11)

All:

Is it really worth parking money for very short term in FD?

For example I have the following payments coming up (all examples)

1) Credit card payment of 30K on 28th — park money for 10 days in FD — return approx Rs. 30

2) Fees of 10K to be paid next month by 20th — park money for 30 days in FD — approx return Rs. 30

3) Bill XYZ for 25k to be paid next month by 10th — park money in FD for 15 days — return around rs. 40

So, all these are just examples and I see that I earn around Rs. 100 (tax needs to be deducted though) by simply putting money into FDs for expenses that are lined up and have cash ready in my pocket

But the point is, is it really worth doing all this for such meager returns as paper filing for income tax may be worth more than the money I earn.

Or is it this is actually a good method and habit to develop? Maybe I can make a few thousands a year by this for the extra effort.

Please don’t think I’m being miserly, but I’m trying to use the principle “Make money work for you…”

Do advise

Thanks,

Ram

11 replies on this article “Short Term FD — is it worth it?”

  1. Ram Mohan says:

    Ok after breaking my head for several hours, here are some facts I found out and some things for thought:

    1) http://apnaplan.com/parking-short-term-money-bank-fixed-deposit-or-liquid-fund-or-savings-bank-account/ — nicely illustrates when you should go in for FD or SB account or Liquid fund based on your tax rates and term. Very informative

    2) Is it really that the money I save on tax worth keeping money in my SB account. Let’s take an example.

    I have a payment coming up in 6.5 months time. The total payment due is 25,000. Now, I have 24,000 cash in hand coming in for this from some other source soon. Here are my options:

    a) Leave the money in my SB account. Interest accrued would be (@ 4% pa) for 6 months approx — Rs. 480 — tax free yipee!

    b) Put my money in FD/Liquid fund. For illustrative purposes, let me consider Quantum LIquid Fund which gives a return of approx 4.23% for 6 months. How much do I get here? Rs. 1015 — wow! But wait a minute, I have to pay tax (highest bracket 30.9%) on this — so my total earning is 1015 – around 701.

    Now, let’s assume that again for illustrative purposes that the difference isn’t so great. Let’s assume that I’ve gone in for a super saver account that gives me 7% interest. So my 24K would become — Rs.840 — tax free!

    If we just go purely by numbers, you might assume that SB super saver account is great. But hold your horses for a minute.

    For me the only time interest was posted in my SB account was on 31st Mar 2011 — (a paltry amount of Rs. 500, but that’s a different story). So, the point is, would you wait right now for 1000 Rs in hand for which you have to pay tax of 313 6 months later (or) would you rather earn Rs. 840 six months later?

    In case 1) i.e. SB account you are waiting for the interest to be paid out to you. But in case 2) i.e. Liquid fund, you get the extra 1K in hand right away. In other words, when I have to make the payment my 24K has magically turned to 25K to pay.

    So is 1K extra in hand with a future liability of 315 better or is 0 extra in hand with a future income of 840 better?

    I guess it depends on each person’s mentality. But my opinion is that if inflation eats away your money, having extra money now and tax payment later is a better deal. Also you have 1K extra income right now to make it work for you again for the next 6 months…

    I think this has become a long post for such a small amount, but I think if you extrapolate as per your financial needs, you can get some insights onto how finances really work

    Comments and corrections on my analysis are eagerly awaited! 🙂

    1. Dear Ram, correct me if I’m wrong but those super saver accounts are sweeping FD account? right? If the money is in FD, that’s not tax free.

      Now coming back to Liquid fund option, well my dear friend, you are earning that return for the risk taken by you. also for your original query, the amount was to be invested for few days only & not for few months. In that sense you have deviated from your own query.

      Thanks

      Ashal

      1. Ram Mohan says:

        Dear Ashal,

        Yes true I have deviated from the topic, but for a few days you cannot really calculate and show differences in returns, can you? Definitely in terms of % it can be expressed, but in practical value will be difficult to show, right?

        Btw, I do not know what the “Super Savings” account is. I’m assuming that I got a “Yes Bank” or “Kotak Bank” that offers 6% interest on normal savings account…

        So if my HDFC bank offers 4% interest rate for a FD from 14 to 21 days, does that mean that they’re not actually offering any benefit for savings account? How can that be?

        1. Dear Ram, SB account is for liquidity of your money whereas FDs are to earn returns. Take your own pick.

          Super Saver accounts are the other name of Sweeping FD accounts.

          Thanks

          Ashal

  2. Dear Ram Mohan, I like your idea for ‘make money work for you’. If you are ready to take that extra bit of pain using netbanking, you may go ahead. I’m not asking to go for liquid or short term funds as there may be a delay while redeeming to get our money in bank account.

    Alternatively you have the option to keep your main SB account with the Bank which is offering 6-7% ROI on SB account (Yes bank or Kotak). In this case, with out doing any work you are earning tax free returns till that 10K limit is reached as declared in the budget.

    Thanks

    Ashal

    1. Ram Mohan says:

      Dear Ashal,

      Thanks as always for your answer. Even I’m wary of liquid funds for this purpose. the following is an extract from their site:

      How long will it take to transfer the amount to my account on redemption?

      Under normal circumstances, if a valid application request is received before 3 p.m. on a business day (T), the investor is likely to receive the funds by the end of the next business day (T+1). The investor would be able to utilise the next day (T+2). However, sometimes there may be a delay on account of technological glitches (most of the transactions occur through direct credits and electronic fund transfers). We would of course put in our best efforts to process transfers at the earliest. We cannot give an assurance on the timelines. SEBI allows a timeline of 10 business days within which the fund needs to process redemption requests.

      So as per SEBI, liquid funds can theoretically take upto 10 days to give you the money. So if I have to use the money for paying some bills, it’s going to be an issue.

      I would also like some additional clarity around whether 4% Savings Bank interest (let’s assume that I’m not opening another SB account for this) is greater than FD – tax if I’m not earning 10K p.a as interest. My savings account does not have more than 4 or 5K balance in it at end of month and may have maximum 30K credit to pay my bills and EMI. This is the account from which I pay my EMI’s etc.

      1. Dear Ram, earning tax free 4% from your ordinary SB account is indeed better than those FDs.

        Thanks

        Ashal

  3. Ram Mohan says:

    Ok, to summarize, there seems to be 2 points of view:

    1) Liquid funds can be used instead of FD. Here, for let’s say 30 days tax rates will be same as highest tax bracket or 15%?

    2) Interest of upto 10,000 is tax free from this financial year. So, maybe if I earn more through Liquid or FD, then I end up losing the gains via taxes??? And maybe leaving it in SB account may in fact gain me more money?

    I’m thoroughly confused now!!!

  4. Your thought process is correct. It is only when you think like this you will inculcate the habit to grow money/generate money.

    Do note that SB account already provides you 4% return. So a 10-day FD return of, say, 6% will only increase the gains marginally. (Not the whole 6% but 6% minus 4%). So your theoretical gain of 30 above is only 30minus20 =10 .

    This is still good but the flip side is this:

    1) You have to do proper book keeping and account all of these gains in the ITR next year. Too much headache to have 30 FDs in a year. But still can be done considering online banking is available and statement generation is all easy.

    2) This strategy made lot of sense until last year as SB interest was full taxed so getting more than 4% even for 3 days made some sense. But given that someone can have interest earned in SB account until INR 10k as tax free – only if you will make more than 10k interest in SB account you need to determine if it is worth moving the funds away. Beyond 10k limit moving to funds like HDFC TAP (Treasury Advantage Plan) and opting for monthly dividend etc. makes sense for someone in 20% and above bracket. For others short term FDs are perfect!

  5. BanyanFA says:

    Ram,
    I am excited to hear about this question. It is not about being miser, but about knowing the value of idle money. I hate when people waste their funds lying idle in their bank accounts. However, FDs is not the right tool to go forward for your short term investment options. Big companies term your activity as “Treasury management”. The only difference is that their figures have several zeros.

    Check out http://insight.banyanfa.com/?p=62 which explains all tools which you have to perform short term activities.

    Regards
    BFA

    1. Ram Mohan says:

      HI BanyanFA,

      I read your article but am a little confused. Is Money Market funds same as Liquid funds?

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