Opening a savings bank account is a traditional method of investment. A savings account offers 3.5-5.5% a year depending on the quantum of deposit. As there is a limit on transactions, account holders are more likely to save a large amount with the savings account.
However, there are other options that give a higher return when compared to savings account. It is lack of awareness that restricts people from investing in these options. Want to know more on Mutual Funds? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial products.
Overnight funds have the lowest maturity period. These are schemes that invest in overnight securities that mature within a day. Because of low maturity period, they possess a high liquidity.
The major advantage of overnight fund is the investment horizon of one day which makes it a very safe and stable investment. Interest rate changes and default in securities do not affect the performance of the fund. These funds will give a return of 5%-6% within a year to 3 years.
Due to better returns and liquidity, overnight funds enjoy an edge over savings account. It is the right option if an investor wants to park money for a short duration.
See Also: How Mutual Funds Work?
A category of debt mutual fund, which invests in short term money market instruments like treasury bills, commercial paper and so on. Liquid funds invest only in instruments that generate fixed interest. The average maturity of liquid funds is 3 months.
Liquid funds are a better savings instrument than savings account. Though they are not entirely risk free, there’s low risk. Fund managers invest only in creditworthy instruments backed up by reliable institutions. They give higher returns than savings account. The maturity period of the fund are generally matched with the maturity period of securities involved, to enhance the returns.
It is advisable to invest surplus cash in liquid funds rather than savings account, to earn greater profits. A major drawback of savings account is that the interest rates are not revised by the banks. Due to short duration, interest rate fluctuations have a very little impact on liquid funds.
Ultra short term funds are closely related to liquid funds. The major difference is that, the former is a category of bond funds, while the latter is a debt fund. The securities and exchange board of India have restricted liquid funds from investing in securities that mature over 91 days. Ultra short term funds are free of this rule. They can invest in securities that mature before or after 91 days. Ideally, the investment horizon of ultra short term funds ranges from 1 to 18 months. Dividends on these funds are higher than interest received on savings account.
These funds are a great investment option for investors with short-term needs. Returns from ultra short term funds range from 7%-9%, without considering the risks involved. This is higher than the returns from savings account. They are not completely risk free. Interest rate risk and credit risk is involved to an extent.
See Also: Mutual Funds with High Returns
Low duration funds are again a category of debt funds. The maturity of these funds range between 6 to 12 months. They are funds with longer maturity compared to liquid and overnight funds. These mutual funds invest in short term securities. The returns from these funds are generally 7% to 8%.
Investors with moderate risk profile can consider investing in low duration funds, instead of opening a savings account. This will provide more liquidity and higher returns linked to prevailing market trends.
Mutual funds that invest in short term instruments are called money market mutual funds. They invest in debt instruments, cash and cash equivalents that are high rated. Quality of instruments ensures that the returns are stable and risk free. Generally money market mutual fund invests in treasury bills, commercial papers, repurchase agreements and so on.
The average maturity of these funds is a year. These are ideal for short term requirements. The returns from these funds are generally 7%-8%. This is higher than savings account. Credit risk, investment risk and interest risk are involved. But the quality of instruments provides a shield against these risks i and helps eliminate them to a great extent.
Investors with short investment horizon and low risk profile may find these funds ideal. These funds have the potential to offer higher returns than savings account.
Financial institutions offer a wide variety of investment options that matches the requirements of investors. All you have to do is, gather information on them, take proper advice and start investing. Do not stick to traditional methods alone. When you do that, you might be missing out on chances to earn greater profits on your investments.
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