There is so much chatter about saving for when your hair turn grey but so little about the importance of creating a contingency and flush fund for the short term. Majority of the time it’s because our knowledge of short-term saving options is so limited and ends with the mention of Fixed Deposits.
Just like in long-term savings, there are a plethora of options you can choose from for parking that extra liquidity every month. So let’s see what are short-term savings, why you should go for them and how can you do it efficiently while protecting your capital.
What Are Short-Term Savings?
Short-term savings are nothing but a sum of the extra buck you have saved month on month over the course of the year. The ideal horizon for short-term savings is 1-12 months while taking very less exposure in terms of risk and maintaining the liquidity of withdrawing your funds.
Short-term savings can be quite helpful in case of emergencies, or if you wish to buy a gadget or even go for a vacation.
Why Should You Save in the Short Term?
When you start saving in the short term it helps you in creating a habit of saving every month in whatever manner possible and the resultant being a bulk amount at the end of tenure. It puts your money on the run to make more money for you rather than just lying idle as cash.
How Can You Save for the Short Term?
There are a range of options starting from a high yielding savings accounts right up to low duration debt funds. Points to consider before you choose what works for you are:
- How soon do you want the money in your hands when you withdraw?
- How long can you wait to keep this money away?
- What is the amount of risk which you can digest to make that extra 2%?
Short Term Saving Options You Can Consider
Savings Accounts
Any normal savings account earns you an average 4% per year if you keep the money idle in the account. There are many banks now offering you a high yield on your savings account for keeping the money deposited with them. For eg. Kotak Mahindra Bank (6%) IDFC First Bank (7%). This is the option with least risk and max liquidity.
Recurring Deposits (RDs)
These are monthly saving options offered by both banks and the postal office. You can save a stipulated amount of money every month via these deposits and the returns generally range from 4-6% per year. You can save for as short as 6months and as long as 10years. If you go for a withdrawal in less than 1 month you won’t get any interest but will get every penny you invested.
Fixed Deposits (FDs)
This is the most popular saving option to save a bulk amount for a fixed tenure. They can be as short as 7 days and as long as 10years. There is a fixed rate of interest ranging from 5-8% per year and can be easily opened with your bank. If you don’t wish to lock in your money via a typical fixed deposit yet get the fixed deposit return you can opt for a money multiplier FD or a linked FD which banks offer. Where by the means of auto sweep your excess cash beyond a point gets automatically transferred to a FD. As and when a particular transaction requires you to draw more, the FD breaks and gets money in your savings account.
Even though FDs are principal protected you can incur premature withdrawal charges when you withdraw before the end of tenure.
Liquid Funds
Mutual funds are where a fund manager invests on your behalf in stocks, bonds and other financial instruments where you can park your liquidity for as short or as long you want to. Liquid funds essentially invest in debt market instruments like treasury bills and government securities. The return ranges from 4-7%. These are slightly risky as they invest in money market instruments which have interest rate risk. For eg. In the current scenario as the RBI is cutting down rates the return on these funds has drastically reduced. To withdraw you need to wait for T+1 day to obtain your funds. To invest in liquid funds you need to go via a mutual fund distributor.
Ultra Short and Low Duration Funds
Similar to liquid funds, ultra short and low duration funds also invest in the same debt market instruments but the ideal time horizon for these is 3-6 months and 6-12 months respectively. As the maturities of the securities change slightly here you need to have patience to keep the funds invested.
Arbitrage Funds
These are mutual funds wherein the fund manager takes advantage of market anomalies to earn returns on your funds. The ideal time horizon for arbitrage funds is 6months and beyond but they are open ended and you can withdraw your money any time and get your fund in T+2 days. The return is in the range of 4.5-6% without any interest rate risk.
So long and short of it, savings for any time horizon are essential don’t forget, every rupee counts, no matter how little starts accumulating. Understand that your money is capable of making more money for you if you invest it in the right place. Stay alert, look for options and take an informed decision!
