Want to park a lump sum amount for the short-term? Know the investment options

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Want to park a lump sum amount for the short-term? Know the investment options&nbsp

New Delhi: Fixed deposits are among the most preferred instruments for short-term lump sum investments. However, FD rates are at an all time low. Currently, a one-year FD at the State Bank of India (SBI) is offering a rate of 4.90%. The post-tax returns fall further for those in the 30 per cent tax bracket; in this case to 3.43%.

However, there are other options, which can provide better returns without compromising too much on safety.

Arbitrage funds

These funds generate a return by simultaneously buying and selling securities, currency or commodities in different markets at the same time. Basically, they try to capitalise on the price differential of security in different markets. Arbitrage funds also do simultaneous buying and selling in a particular security in both the cash and derivatives market to lock in a specific amount of profit. Although in most of the cases these trades result in a profit, losses in these trade can not be ruled out.

From a taxation point of view, arbitrage funds are treated as equity funds. Hence, short-term (sold within one year of investment) gains are taxed at 15 per cent whille long-term gains (booked after one-year of investment) will be taxed at 10 per cent.

Liquid funds

These are open-ended debt mutual funds that invest in money market instruments like a certificate of deposits, commercial papers, treasury bills with up to 91 days maturity, term deposits etc. These funds do not have any exit load and are highly liquid in nature. Redemptions from these funds are processed within 24 working hours.

Liquid fund returns booked within three years of investment are treated as short-term gain and are taxed as per the income tax slab of the investors. Returns booked after three years are treated as long-term capital gain and are taxed at 20 per cent after taking in to account indexation benefits.

Savings account

Some banks, such as IDFC First and Bandhan Bank, are offering interest rates up to 7% on their savings bank accounts. The post-tax return for a person in the 30% tax bracket will be 4.9%, if the savings account is offering 7%.

However, these banks generally have a higher minimum balance requirement, of at least Rs 1 lakh, for savings accounts offering high-interest rates.

If the amount is not huge (more than Rs 2.5 lakh), one can consider parking the money in a savings account that offers a higher return. Savings bank interest up to Rs 10,000 in a financial year is not taxable. 

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