Where to deploy short-term money? 4 financial instruments to park funds

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In order to create wealth, you need to make prudent investments to make your money work for you. Thankfully, there are multiple investment avenues where you can invest as per your financial goals, risk tolerance, and liquidity needs.

While long-term investments have always drawn attention, it is equally vital to focus on short-term investments, which you can easily convert into cash within 1 to 5 years.

Here are 4 financial instruments in which you can put your short-term money.

1. Liquid Funds
Financial prudence calls for being emergency ready and Covid-19 heightened the importance of having a sizeable emergency corpus. The corpus should be equivalent to at least a year’s expense.
You can put your money in liquid funds to build a contingency corpus.
These funds invest in money market securities maturing in 91 days and have the potential to offer slightly higher returns than a savings account.
You can easily convert it into cash, and upon redemption, the money is credited into your account within 2-3 business days.
ELSS, or equity-linked savings scheme (ELSS), is a category of mutual funds that invests most of its assets in equities.
ELSS is the only mutual fund offering tax-saving benefits under section 80C of the Income Tax Act, 1961. In other words, investment in ELSS can help you lower your tax liability.
ELSS has a lock-in of 3 years, which means you can’t withdraw money for 3 years from the date of investment. The lock-in gives time for your money to grow, and if you stay invested for a long period, you can get inflation-beating returns.
However, note that ELSS can carry a moderate to high risk; therefore, it is prudent to go ahead only if you have a high-risk tolerance.

3. Tax-saving Fixed Deposits
You can also park your short-term money in tax-saving FDs that have a tenure of 5 years. As the name suggests, investing in tax-saving FDs helps you lower your taxes.
However, note that, unlike regular FDs that you can liquidate before their tenure by paying a nominal penalty, you can’t do so in a tax-saving FD. If you feel your liquidity needs may arise before 5 years, you can opt for the plain vanilla bank FD.

4. Savings Account Offering a High-Interest Rate
You must have seen advertisements of banks offering savings accounts with a high-interest rate. You can contemplate opening an account with any such bank and put your money.
Some banks provide monthly interest instead of quarterly payout, which can help you grow your savings and withdraw money when required.

The Final Word
The above-mentioned short-term investment options can help you meet your short-term financial requirements and also lower your tax liability. Happy investing!

(The author is President & Head, Personal Wealth,

Wealth Management)

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