3 best investment options to park short-term funds
If you have funds and want to get a good return from that fund which you almost want to redeem after a while i.e. want to make a short term investment, here are some good investment options :
Keep in mind here that the point being made is that these returns may or may not earn you a higher return, but may allow you to balance the total risk of your portfolio as a whole:
1. Arbitration Fund:
These funds tend to take advantage of the price differential in the spot and futures market to generate good returns. Here, the fund manager who manages the arbitrage fund buys securities in the spot market and simultaneously sells them in the space of futures or derivatives, giving the investor a profit.
For investment, these are hybrid mutual fund products that invest in both debt and equities but primarily equities and are therefore taxed at the equity fund level. Over the past year, the average return for the category was 3.2% according to Value Research.
2. Short term mutual funds:
These funds typically invest in money market instruments and other debt securities, but hold assets of longer duration or of lower credit quality. Therefore, they have a higher credit risk and higher interest rate.
In the case of short-term mutual funds, if the holding period is up to 3 years, the short-term capital gains tax at the personal income tax rate applies.
And for a holding period of more than 3 years, the indexation benefit is authorized for the tax on long-term capital gains. Indexation means that for the purposes of calculating the capital gain, the purchase price may be increased to compensate for inflation. Long-term capital gains are currently taxed at a lower rate of 20%.
3. Corporate Bond Fund:
Short-term investors may want to consider corporate bond funds with a shorter maturity. These are indeed the best funds that lend at least 80% of their corpus to the best rated companies.
Investors with a 2-3 year time horizon can invest in the plan for a good return.
These funds offer investors a better return compared to term deposits of the same maturity.
In addition, a long-term investment in these funds can be very advantageous because they then offer tax-efficient returns thanks to the advantages of indexation.
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Article first published: Saturday, June 26, 2021, 11:54 a.m. [IST]