In today’s world, financial security for an individual is a must. Which means that at any point of time, that person should have a contingency fund to take care of expenses that are unexpected in nature. Unforeseen expenses such as medical emergencies can seriously dent one’s savings.
Usually, a majority of the people prefer to leave the money in their savings account due to the ease of availability of their money. Many, however, fail to realise that the interest received through savings account is less than that of the rate of inflation. This means that the person’s money is actually losing value in comparison to inflation. Here we suggest some effective alternatives to a savings account.
What are the type of short-term investment options?
A savings account is a deposit account which bears a nominal interest rate for individuals to save and earn interest on the cash they hold. Interest rates offered are usually less than that of Certificate of Deposit, a document issued by a bank to a person depositing money for a specified period of time or Commercial Paper, a short-term money market instrument which has a fixed maturity period as savings accounts require no credit check and offer high flexibility on withdrawal of funds.
Liquid funds are debt mutual funds that invest in securities whose maturity cannot exceed 91 days. These type of funds do not have any lock-in period and as the name suggests, are quite easily and conveniently redeemable.
Ultra-Short Term Funds
Ultra-Short term funds typically invest in fixed income securities such as certificates of deposits, treasury bills, commercial papers or corporate bonds. The income they earn is from the coupon payments received from its underlying investments.
Historically, both Ultra short-term funds and Liquid funds have given higher returns than a savings account with similar liquidity but savings account still offered more flexibility inaccessibility of money. This, however, is not the case anymore due to the introduction of an instant redemption facility available with certain liquid funds. Through the instant redemption schemes, an investor has access to his corpus 24/7 365 days a year. A daily limit of Rs 50,000 or 90 percent of redeemable value is offered by the fund houses through the IMPS banking platform.
A historical comparison of returns made by Liquid Funds against that made through Savings Account
To conclude, if like an online purchase or a chat with your friends, if a habit of “Savings” is also made simpler, would you still want to keep your idle cash in a bank account or under the pillow? The answer to this would most likely be a NO! As we’ve seen here, there are certain funds that provide an effective alternative option that allows you to invest your extra idle cash, earning relatively good returns at great convenience.
*For the purpose of calculations, the returns of all liquid funds existing at that point of time have been considered.
To know more about financial planning click here: Wealthsecure