Also read: Where to invest: Here are top 10 investment options to choose from
1. Bank fixed deposits
Tenure: FDs come with various tenures ranging from 7 days, 14 days, 30 days, 45 days to a year or even up to 10 years. Durations of FDs will defer across banks. FDs can be renewed on maturity and the funds can be reinvested. Under the deposit insurance and credit guarantee corporation (DICGC) rules, each depositor in a bank is insured up to a maximum of Rs 5 lakh for both principal and interest amounts.
Liquidity: Some banks may offer deposits that don’t allow premature withdrawals. Instead of locking funds for a particular duration, an investor may spread the amount across different maturities through ‘laddering’.
Returns: As per the need, one may opt for monthly, quarterly, half-yearly, yearly or cumulative interest options. The rate of interest that banks offer is somewhat aligned to the Reserve Bank of India (RBI) repo rate and the bank’s own cost of funds. State Bank of India (as on September 5, 2023) offers interest rates ranging between 3% and 5.75% interest rates on FD tenures between 7 days and one year. HDFC Bank offers FD interest rates between 3% and 6%.
Taxation: The interest rate earned is added to one’s income and is taxed as per income slab. If the interest earned is more than Rs 10,000 a year across all branches of the bank, there is a tax deduction at source (TDS) by the bank.
Also read: Latest Bank Fixed Deposit (FD) Interest Rates in India for 2023
2. Company FD
Tenure: A fixed deposit offered by a company is unsecured deposits and hence comes with higher risk compared to a bank FD. In case of a default, the depositors have the last right on the company’s assets. Manufacturing companies and non-banking finance companies (NBFCs) issue such deposits but it’s only NFBCs that offer deposit short-term tenures. To gauge the risk involved with corporate FDs, first check their ratings given credit bureaus such as CRISIL, CARE and ICRA. The credit ratings should be high. Go with FDs that have AAA or at least AA+ ratings. Company FD rates are still over 8%: Who should invest in a corporate fixed deposit, who should avoid?
Also read: Company FD rates are still over 8%: Who should invest in a corporate fixed deposit, who should avoid?
Liquidity: Although premature exit is allowed, it’s at the company’s discretion to honour it. Further, there are penalties depending on the tenure the deposits.
Return: ICICI Home Finance offers an interest rate of 7% for 1-year company deposits and Manipal Housing Finance Syndicate offers 8.25%.
Taxation: The interest rate earned is added to one’s income and is taxed as per one’s income slab. If the interest earned is more than Rs 5,000 a year across all branches of company, TDS will be cut by the company.
3. Post office time deposits
Tenure: Post office also accepts time deposits which are similar to a bank FD. A Term Deposit (TD) can be placed for any of the four tenures- 1, 2, 3, and 5 years.
Liquidity: According to the India Post website, “No deposit shall be withdrawn before the expiry of six months from the date of deposit. If TD account closed after 6 month but before 1 year, PO Savings Account Interest rate will be applicable. Interest shall be payable annually, No additional interest shall be payable on the amount of interest that has become due for payment but not withdrawn by the account holder.”
Returns: For the short term, one may invest in a 1-year POTD where the interest is paid annually but calculated quarterly. Every quarter, the rates are assessed by the government, and accordingly, reset. For the quarter ending September 30, 2023, the 1-year POTD is fetching 6.9%.
Taxation: The interest rate earned is added to one’s income and is taxed as per one’s income slab.
4. Recurring Deposits
Tenure: If one wants to save regularly for a short term, say for 6, 9 or 12 months, a bank recurring deposit (RD) can come in handy. In RD, one has to invest at regular intervals for a fixed period and up on maturity will receive a lump sum amount. Most banks allow investing in a RD online.
Tenure: The minimum period of deposit is six months, while the maximum period of a deposit is 10 years
Liquidity: “Premature withdrawals are However, depending on the bank, they may allow you to close your account before the maturity period on certain conditions,” stated the HDFC Bank website.
Returns: “The interest rate, once determined, does not change during the tenure; and on maturity, the individual will be paid a lumpsum amount which includes the regular investments as well as the interest earned. The rate of interest is equivalent to that offered for a Fixed Deposit,” informed the HDFC Bank website.
Taxation: The interest rate earned is added to one’s income and is taxed as per one’s income slab. If the interest earned is more than Rs 10,000 a year (including interest on bank deposits) across all branches of the bank, TDS will be cut.
5. Debt mutual funds
Here is a look at four types of debt mutual funds one can use to invest for the short term as the maximum maturity of the underlying securities in them is not more than 12 months.
Liquid fund: “Liquid Funds, as the name suggests, invest predominantly in highly liquid money market instruments and debt securities of very short tenure and hence provide high liquidity. They invest in very short-term instruments such as Treasury Bills (T-bills), Commercial Paper (CP), Certificates Of Deposit (CD) and Collateralized Lending & Borrowing Obligations (CBLO) that have residual maturities of up to 91 days to generate optimal returns while maintaining safety and high liquidity. Redemption requests in these Liquid funds are processed within one working (T+1) day,” as per the Association of Mutual Funds in India website.
Ultra Short Duration Fund: These invest in debt & money market instruments with Macaulay duration of the portfolio between 3 months – 6 months
Low Duration Fund: Investment in Debt & Money Market instruments with Macaulay duration portfolio between 6 months- 12 months.
Money Market Fund: Investment in Money Market instruments having maturity up to 1 Year.
Liquidity: The liquidity is high in these funds and units can be redeemed in quick time.
Taxation: The taxation of debt mutual funds (MFs) has changed from FY 2023-24. According to the amended income tax laws, investment made in specified debt mutual funds on or after April 1, 2023, would be taxed at income tax slabs applicable to your income at the time of redemption. For investments made till March 31, 2023, the redemptions from such specified mutual funds will be taxed as per the holding period of the mutual fund schemes. If the holding period of specified debt mutual funds is less than or equal to three years, then it will be taxed at the income tax slabs applicable to your income. If the holding period exceeds three years from the date of investment, then it will be taxed at 20% with indexation benefit.