Investment Options To Meet Short Term Financial Goals

Five instruments that offer higher capital protection income certainty and liquidity features

Investment Options To Meet Short Term Financial Goals
Explore the short term investment instruments
Sahil Arora - 17 March 2021

Short term financial goals have investment horizons of up to 3 years. Since these horizons endow lesser time to recover losses from market volatilities and corrections, such investments should lay greater emphasis on the preservation of capital and income certainty, than on the yielding of higher returns.

Below is listed 5 short term investment instruments that offer higher capital protection, income certainty and liquidity features.

Short-Term Debt Mutual Funds

Short term debt funds such as the ones with short/ ultra-short/low duration, and overnight and liquid funds come with shorter maturity periods. This makes them less prone to interest rate risk, which leads them to offer higher capital protection than funds that have longer maturity periods.

Overnight and liquid funds have the potential to yield higher returns than savings bank accounts, whereas low, short and ultra-short duration funds have the potential to yield higher returns as compared to fixed deposits of the same tenure. Those looking to avail higher degree of capital protection should consider short term debt funds with highest exposure to sovereign debt instruments and AAA-rated corporate bonds.

Short term debts funds are more tax-efficient than fixed and recurring deposits for investors that fall in higher tax brackets, with investment horizons of over 3 years. Returns booked on redemption of investments after 3 years are considered long term capital gains and are taxed at the rate of 20 per cent with indexation benefits. Returns booked on redemption of debt mutual funds within 3 years of investments are considered short term capital gains and are taxed according to the investor’s tax slab.

Debt Mutual Funds

Debt Funds Category

Fund Category Average Returns (%)

1 Year

3 Year

5 Year

7 Year

Debt: Short Duration

6.22

6.28

6.74

7.41

Debt: Low Duration

5.78

5.13

6.02

6.64

Debt: Ultra Short Duration

4.56

5.70

6.26

6.92

Debt: Liquid

3.58

5.59

6.13

6.80

(Data as on 4th March 2021, Source: Paisabazaar)

Bank Fixed Deposit

Bank fixed deposits provide a higher degree of capital protection and income certainty. The depositors continue to earn interest as per the booked rate regardless of any change in the fixed deposit rates. Bank fixed deposits opened with scheduled banks are also protected from bank failures through the deposit insurance program provided by the DICGC, an RBI subsidiary. The insurance cover is provided on cumulative deposits (including fixed, recurring, current and savings accounts) of up to 5 lakh per depositor.

Currently, the highest fixed deposit rates offered by some private sector and small finance banks range between 6.00-7.25 per cent per annum, nearly 175-230 bps higher than the highest fixed deposits rates offered by large private and public sector banks.

Most bank fixed deposits charge a premature withdrawal fee of up to 1 per cent on closure of fixed deposits before maturity. This penalty is deducted from the effective interest rate, which is generally lower than the booked fixed deposit rate and the original fixed deposit rate for the period that it has been in force.

Fixed Deposit Rates

Bank Name

Interest Rates

Highest slab (%)

1-year tenure (%)

3-year tenure (%)

5-year tenure (%)

SMALL FINANCE BANKS

Suryoday Small Finance Bank

7.25

6.75

7.00

7.25

Jana Small Finance Bank

7.25

6.75

7.00

7.00

Utkarsh Small Finance Bank

7.00

6.75

6.75

6.75

Equitas Small Finance Bank

6.80

6.50

6.65

6.40

AU Small Finance Bank

6.50

5.25

6.50

6.25

PRIVATE SECTOR BANKS

DCB Bank

6.75

6.05

6.75

6.75

RBL Bank

6.60

6.50

6.60

6.25

State Bank of Mauritius

6.50

6.50

6.00

6.00

Nainital Bank

6.35

5.25

5.35

5.35

IDFC First Bank

6.00

5.75

5.75

5.75

IndusInd Bank

6.50

6.50

6.50

6.50

Axis Bank

5.50

5.15

5.40

5.50

HDFC Bank

5.50

4.90

5.15

5.30

ICICI Bank

5.50

4.90

5.15

5.35

Kotak Mahindra Bank

5.30

4.50

5.10

5.30

PUBLIC SECTOR BANKS

Union Bank of India

5.60

5.25

5.50

5.55

Canara Bank

5.50

5.20

5.50

5.50

State Bank of India

5.40

5.00

5.30

5.40

Bank of India

5.30

5.25

5.30

5.30

Punjab National Bank

5.30

5.20

5.20

5.30

Source: Paisabazaar

Rates as on 5th March 2021

Recurring Deposit

Recurring deposit is a variant of fixed deposits, where in the depositors deposit fixed amounts every month for a predetermined tenure. Regular monthly deposits instill financial discipline among depositors and also allow them to build financial corpuses over a period of time. Most banks offer the same interest rates for their recurring and fixed deposits for the same tenure.

Depositors should note that banks penalize late depositing of their monthly installments. Similar to fixed deposits, recurring deposits too allow premature withdrawals in lieu of penalty. The interest incomes earned through recurring deposits are also taxable as per the tax slab of the depositor.

Recurring Deposit Rates

Bank Name

Interest Rates

Highest Slab

1 year tenure (%)

3 year tenure (%)

5 year tenure (%)

Small Finance Banks

Utkarsh Small Finance Bank

8.00

7.25

8.00

7.25

Suryoday Small Finance Bank

7.25

6.75

7.00

7.25

Jana Small Finance Bank

7.25

6.00

7.00

7.25

Equitas Small Finance Bank

6.65

6.50

6.65

6.40

Private Sector Banks

Yes Bank

6.75

6.25

6.75

6.75

Axis Bank

5.50

5.15

5.40

5.50

ICICI Bank

5.50

4.90

5.15

5.35

HDFC Bank

5.50

4.90

5.15

5.30

Public Sector Banks

Canara Bank

5.50

5.20

5.50

5.50

State Bank of India

5.40

5.00

5.30

5.40

Source: Paisabazaar.com

Rates as on 5th March, 2021

High Yield Savings Account

Savings accounts are usually used by the depositors to park their short term surpluses before using them for investments or expenditure heads. Most of the banks offer a low rate of interest on their savings bank account, generally in the range of 2.9 per cent and 4.75 per cent per annum for deposits within Rs 1 lakh. However, some private sector and small finance banks have started offering higher interest rates on their savings account deposit. The interest rate of such savings accounts can range anywhere between 5 per cent and 6 per cent per annum Higher interest rates, excellent liquidity and the availability of deposit insurance cover from the DICGC make high yield savings accounts an excellent tool for risk averse investors for parking their short term surpluses as well as their emergency funds.

As far as taxation is concerned, Section 80TTA allows savings account depositors to claim a tax deduction of up to Rs 10,000 on the total interest income earned from their savings account. However, interest income exceeding Rs 10,000 is taxed as per the depositor’s tax slab.

Savings Account Interest Rates

Bank Name

Interest Rate Slab

Small Finance Banks

Suryoday Small Finance Bank

Upto & including Rs1 lakh

: 4%

Above Rs1 Lakh upto & including

Rs10 lakh: 6.25%

Above Rs10 lakh: 6%

Utkarsh Small Finance

Bank

Up to Rs1

lakh: 5%

Above Rs1 lakh

to Rs25 lakh: 6%

Above Rs25 lakh: 7.25%

North East Small Finance

Bank

Less than Rs4.99 lakh: 4%

Above Rs5 lakh

up to Rs25 lakh: 5%

Above Rs25 lakh up to Rs10 crore: 5.50%

Above Rs10

crore to Rs25 crore: 5.75%

More than

Rs 25 crore & above: 6%

Jana Small Finance

Bank

Upto Rs. 1

lakh: 3.5%

Above Rs. 1 lakh

& up to Rs 10 lakh: 6%

Above Rs 10 lakh

& upto Rs 50 crore: 7%

Above Rs

50 crore: 7.25%

Au Small Finance

Bank

Less than

Rs1 lakh: 3.5%

From Rs1 lakh to

less than Rs5 lakh: 5%

From Rs5 lakh

to less than Rs10 lakh: 6%

From Rs10

lakh to less than Rs5 crore:7%

From Rs 5 crore to less than

Rs 10 crore: 6%

Private Sector Banks

IDFC First Bank

Less than equal

to Rs1 crore: 6%

Above Rs1 crore up to & including

Rs 5 crore: 5%

Above Rs5 crore up to & including Rs 10 crore: 4%

Above 10 crore: 3.5%

RBL Bank

Upto Rs1

lakh: 4.75%

Above Rs1 lakh & upto Rs10 lakh: 6%

Above Rs10 lakh & upto Rs3 crore:6.50%

Above Rs3 crore & upto Rs5

crore: 6.50%

Bandhan Bank

Upto Rs1

lakh: 3%

Above Rs1 lakh

to Rs10 crore: 6%

Above Rs 10 crore

to Rs 50 crore: 6.55%

Above Rs50 crore: 7.15%

IndusInd Bank

Upto Rs1

lakh: 4%

Above Rs1 lakh

upto & including

Rs10 lakh:5%

Above Rs10 lakh: 6%

Source: Paisabazaar

Rates as on 5th March 2021

Corporate Fixed Deposit

Corporate fixed deposits are issued by NBFCs, HFCs and other financial institutions. Their interest rates are usually higher than bank fixed deposits and stay fixed throughout the booked term. However, unlike fixed deposits opened with scheduled banks, corporate fixed deposits are not covered under any deposit insurance cover. Hence, investors with lower risk appetite should prefer corporate fixed deposits offered by the companies with AAA ratings. Note that, like bank fixed deposits, corporate fixed deposits charge a premature withdrawal fee and their interest incomes are taxed as per the tax slab of the depositor.

Company Fixed Deposit Rates

Company Name

Credit Rating

Interest Rates (p.a.)

Tenure range

1-year

tenure

3-year

tenure

5-year

tenure

Shriram Transport Finance Co. Ltd.*

CRISIL-FAAA

ICRA-MAA+

7.25%

7.86%

8.09%

12-60 months

Shriram City Union Finance Co. Ltd.*

ICRA-MAA+

7.25%

7.86%

8.09%

12-60 months

Bajaj Finance Limited**

CRISIL- FAAA

ICRA- MAAA

6.15%

7.00%

7.00%

12-60 months

Kerala Transport Development Finance Corporation Ltd.*

Guaranteed by Kerala Govt.

6.00%

6.00%

5.75%

12-60 months

PNB Housing Finance Ltd.

CRISIL-FAA+

CARE-AA

5.90%

6.60%

6.70%

12-120 months

Sundaram Home Finance

CRISIL-FAAA

ICRA-MAAA

5.75

6.25

6.25

12-60 months

Mahindra Finance Ltd.

CRISIL-FAAA

5.70%

6.30%

6.45%

12-60 months

HDFC Ltd. (Regular Deposit upto Rs 2 cr)

CRISIL-FAAA

ICRA-MAAA

5.70%

5.95%

6.20%

12-120 months

LIC Housing Finance Ltd.

CRISIL-FAAA

5.65%

5.75%

5.75%

12-60 months

ICICI Home Finance

CRISIL-FAAA

ICRA-MAAA

CARE-AAA

4.30%

5.95%

6.25%

12-120 months

*Monthly rests

** Rate benefit of 0.10% for online customers,not applicable for senior citizens.

Data as on 5th March 2021

Source: Paisabazaar.com

The author is the Director of Paisabazaar.com

DISCLAIMER: Views expressed are the author's own. Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.

Advertisement*

Latest Issue

Outlook Money
January 2023

Askmoney



Advertisement*
Advertisement*
ADVERTISEMENT*