While there are several lucrative options for long term investments, the options for short term investments are fewer. Most of the people choose to let their money stay in their savings account. This is largely due to their ignorance about short term debt funds & liquid funds
Short term debt funds & liquid funds can fetch you 7%-8% returns on your investments. This is huge compared to keeping you money in your savings account, which would fetch you 4%.
Liquid funds invest in very short term debt instruments having a maturity period of less than 91 days. They are the lowest risk category of debt funds because neither do they invest in lower rated corporate bonds nor do they take long-term rate calls. Generally Liquid Funds will not have any exit load.
Ultra Short Term Debt Funds invest in slightly longer term debt instruments with maturity of more than 91 days and less than 1.5 years. Some of these funds may invest in lower rated corporate debt. Ultra Short Term Funds may also levy an exit load for investors who redeem units within a specified period.
We always invest in short term, ultra short term debt funds & liquid funds for monies saved for our traveling or even the latest gadgets. Unlike fixed deposits, there is no exit load on these investments. Considering that these funds invest only in debt & treasury bonds one can rest assured that they will get 7%-8% ROI.
The following are the benefits of investing in liquid funds or short term/ultra short terms debt funds
1) You will have to personally go to your bank, to redeem your fixed deposits. On the other hand you can redeem your liquid fund/short term debt fund from the comfort of your home/office.
2) Some liquid fund houses even provide their investors with a ATM card. This card can be used to withdraw cash from your nearest ATM.
3) While short term/ultra short term funds require 1-2 working days, some liquid funds once redeemed hit your bank account that very instant. For example if you are out shopping with your family & you find that your savings account is empty, you can choose to redeem you liquid fund. The money will be instantly transferred to your savings account.
Short term debt funds or liquid funds are ideal for a time horizon of less than a year. Do remember that you will have to pay taxes on capital gains accrued from redeeming your ultra short term debt funds & liquid funds.