- Date : 12/07/2021
- Read: 11 mins
It is easy to lose one’s head over a sudden windfall, so be careful when choosing an investment option that suits your requirements
Child contestants on the TV show America’s Got Talent are often asked what they would do with a million dollars in prize money if they won. The replies are, needless to say, naturally childlike.
- In 2013, singer Chloe Channell, then a precocious 11-year-old, said she would buy a hunting camp – a cabin in a designated hunting area – as she hoped to “kill a big old buck”.
- After winning the 2016 title, singer-actress Grace VanderWaal, then aged 12, said she would get a tree house.
- The following year, the youngest runner-up in the competition to date, singer-actress Angelica Hale, then aged nine, said she would buy a puppy.
- In 2019, Spanish singer Charlotte Summers, then aged 13, said she would buy a guinea pig and name it 'Simon' after celebrity judge Simon Cowell.
In short, to borrow the sentiments of another popular TV show, kids say the darndest things.
But you’re not a kid. What would you do if you suddenly came into some money – maybe not as big a bundle as a million dollars, but something smaller in Indian rupees, like Rs 20,000 or even more, which you may have received as bonus, gift, or back pay?
You can always have a short vacation or buy something you have always wanted, but you can also invest it in a short-term scheme for about six months to a year as a lump sum investment. We will look at the second option here.
What is a lump sum investment?
As its name suggests, an investment that involves investing an entire amount at one go is a lump sum investment. Popular among HNI and big-ticket investors, it is generally considered an excellent long-term investment option.
However, given that your corpus is modest, you can also consider making a lump sum investment over the short term. There are several short-term debt fund options that come in handy when you have some excess funds, such as:
- Liquid funds
- Savings bank accounts
- Short-term funds
- Ultra short-term funds
- Arbitrage funds
- Fixed deposits
- Fixed maturity plans
- Post office term deposits
- We will see what each of these are and what they mean for you:
If you want to hold your money for six months to a year and funds at any point thereafter, one of the best options is a liquid fund; these are a class of debt funds that invest in short-term fixed-interest generating money market instruments, such as treasury bills, certificate of deposits (CD) government securities etc.
Liquid funds offer interest rates of about 5%-8% annually, with a taxation process similar to other debt funds – you get indexation advantage if you stay invested for three years or more, and are taxed as per your tax slab for periods less than that.
Listed below are the top five liquid funds in India based on returns of the past year:
- Aditya Birla Sun Life Liquid Fund Growth: 7.49%
- Axis Liquid Fund Growth: 7.47%
- UTI Liquid Fund – Cash Plan Growth: 7.47%
- ICICI Prudential Liquid Fund Growth: 7.4%
- L&T Liquid Fund Growth: 7.37%
(Source: Clear Tax dated: 27 April 2021)
Savings bank accounts
Savings accounts are designed to encourage one to save more as they earn interest, as opposed to current accounts, which allow unlimited transactions and offer no interest. However, this form of bank deposit is also favoured for its liquidity, and not as a means to earn high interest. You can withdraw this money any time, and this makes savings accounts suitable for people who have short-term goals like a holiday or buying a new car.
Interest earned is taxable under the head “income from other sources”, though income up to Rs 10,000 is exempt under Section 80TTA. That is, you can claim deduction up to this amount. Any interest amount you receive will be added to your total income and taxed accordingly. Different banks have different interest rates for savings accounts, usually ranging from 2.5% per annum to 4% per annum, though it can go beyond that too.
In accordance with SEBI norms, short-term funds have durations between one and three years. They invest in debt instruments such as corporate bonds, government securities, securitised debt, derivatives, bonds issued by financial institutions, and public sector enterprises. They also hold a part of their portfolio in money market assets such as treasury bills and commercial papers so as to maintain liquidity.
These funds are ideal for parking any amount you don’t need for at least 12–18 months, deliver better returns than FDs, and are more tax-efficient if held for three or more years. (When you hold a debt fund for three years, your gains are treated as long-term capital gains and taxed after indexation, which means a very low taxation rate as compared to the marginal tax rate for an interest income from a bond or a deposit.)
According to ET Money, the top five short term funds in terms of three-year and five-year returns are:
|IDFC All Seasons Bond Fund||9.87%||8.97%|
|IDFC Bond Fund Short Term Plan||9.40%||8.72%|
|Invesco India Short Term Fund||9.30%||8.55%|
|SBI Short Term Debt Fund||9.39%||8.71%|
|Kotak Bond Short Term Fund||9.90%||8.12%|
Ultra short-term funds
If you have surplus funds that you wish to earn from over 1-9 months, you can consider ultra short-term funds; typically, the investment period involved is from a week to about 18 months. If you take this route, you can invest in a fund house with instructions to switch a regular sum every month to an equity fund of your choice. This brings you two benefits: your money is parked in an ultra short-term fund that offers high liquidity, and you also earn higher dividends than you would from a regular liquid fund.
According to a Clear Tax report from 4 January 2021, the top five ultra short-term funds in terms of three-year returns are:
- ICICI Prudential Ultra Short Term Fund: 7.68%
- Aditya Birla Sun Life Ultra Short Term Fund: 7.65%
- L&T Short Term Fund: 7.36%
- Canara Robeco Ultra Short Term Fund: 6.19%
- UTI Ultra Short Term Fund: 5.72%
Arbitrage funds are mutual funds, which are subject to market risks. However, they are designed in a way to protect your investment. They buy securities from one market and sell it in another, usually at a profit; for instance, buying low from the cash market and selling high in the futures market, taking advantage of the stock market volatility.
Arbitrage funds are riskless, and are suitable for an investment horizon of 1-3 years. Returns are more tax-efficient compared to FDs, though they can be even more tax-efficient when parked for over a year.
Listed below are the top five arbitrage funds in terms of three-year returns as on 4 January 2021, according to ClearTax:
- Nippon India Arbitrage Fund: 6%
- Edelweiss Arbitrage Fund: 5.93%
- L&T Arbitrage Opportunities Fund: 5.92%
- UTI Arbitrage Fund: 5.89%
- Kotak Equity Arbitrage Fund: 5.88%
Fixed deposit (FD)
This is one of the most common and popular options of investments for people averse to taking risks, as interest on the deposited amount is accumulated over a fixed period of time. The interest rate depends on the type of bank you patronise (public sector, private sector, or small finance), and range from 3% per annum on FDs of less than Rs 2 crore (for deposits less than one year) to 9.54% per annum (for deposits of up to 10 years).
Senior citizens are offered higher interest rates, usually 0.25% to 0.65% more than the normal rates. The tenure ranges from seven days to 10 years.
Fixed maturity plans (FMP)
Commonly known as FMPs, fixed maturity plans are close-ended debt mutual funds that mature after completion of a pre-determined time. FMP investments can be made only during the new fund offer period, after which no new investments can be made into an FMP scheme. Also, FMPs do not allow premature redemption of units; they can be redeemed only after the scheme has matured, with maturity periods usually being three years or more.
However, investors who hold units in the demat mode have the option to sell their units on the stock exchange which have units of an FMP scheme listed. Thus, they can exit the plan ahead of its tenure-end. As a result, long-term capital gains tax rules including indexation benefits come into play; as indexation provides investors with the benefit of factoring in inflation, the overall tax liability on capital gains is reduced.
FMPs generally invest in high-quality debt and money market instruments with low levels of credit risk for investors, such as:
- Government Securities (G-Secs)
- T-Bills (Treasury Bills)
- Liquid scheme units
- Repo and Reverse Repo Instruments
- Highly-rated NCDs (non-convertible debentures)
- Securitised Debt Instruments
- CDs (certificate of deposits)
- CPs (commercial papers)
The table below shows the top-five MPS with three-year and five-year returns:
|Nippon India Gilt Securities Fund-Direct Plan||10.46%||11.31%|
|IDFC Government Securities Investment-Constant Plan- Direct Growth||10.42%||12.44%|
|IDFC Government Securities Investment-Constant Maturity - Regular Growth||10.29%||12.50%|
|ICICI Prudential Constant Maturity Gilt Fund- Direct Plan Growth||10.15%||12.05%|
|SBI Magnum Constant Maturity Fund- Direct Plan Growth||9.68%||
(Source: Clear Tax)
Post office term deposits
Post office term deposits are popular among people of a certain generation, mainly on account of the security they enjoy. After all, they are government-authorised.
Officially billed as the Post Office Time Deposit Account, this scheme allows you to park your money in any post office in India. Apart from being quite affordable, a deposit with a five-year lock-in period also qualifies as a tax-saving investment, allowing you to claim deductions on interest for up to Rs 1.5 lakh.
Below are the interest rates offered:
- One-year: 5.5%
- Two-year: 5.5%
- Three-year: 5.5%
- Five-year: 6.7%
It is easy to lose one’s head over a sudden windfall, so be careful and choose an investment option that suits your requirements. If you do not want any risk, avenues such as FDs, post office schemes, and recurring deposits are advised. But if you have higher risk appetite, you can always try the other options. But do be wary of high interest rates offered; rather, look at the company's fundamentals. The high interest rate offered now may seem very enticing, but you will have no idea what the situation of the company will be in the coming years. Look at these 5 Short-term investment plans for those who don’t have a financial goal.