Short term financial planning

So we decided that we need to invest and invest is such a way that we do not lose our capital. What are the options we have? When it comes to savings, it depends on your needs. Let’s look at the options available for our short term needs.

Savings Accounts

All of us have a savings account, it is a safe investment or should we say savings. How much do we earn? Currently we get 3.5% per annum. Yes, that is income, but the inflation is much above that. Your money does not work for you here. After taking into account inflation, you would actually be losing money. This account is only meant to keep you liquid. Therefore here money should be kept only to meet our average monthly expenses.

Term Deposits (Fixed Deposits)

This gives us a return from 8 to 10% per annum depending on the bank and tenure. The return on this is slightly better than savings Account and closer to the inflation rate. Indirectly our money would be growing at approximately the same rate of inflation. Taking into account some emergency situation, about 3 months current average expenses should be kept in fixed deposits. If you withdraw your money before maturity, the bank imposes a penalty, which could wipe off the interest earned. That should not matter since this money was kept for emergency use. If you are looking for a large investment in a few months down the line and the money is lying in your Savings account it would make more sense to put the money in Term Deposits for a few months. Banks give you such flexibility. You could also go for Money Market Mutual funds or Fixed maturity plans.

Money Market Mutual Funds

These funds usually give you returns in line with the market and just above inflation rate. This would be more like the Term Deposits but better returns. But this comes with more restrictions, especially on withdrawals. Though there is insurance on Savings accounts and Term Deposits to the tune of Rs. 1 Lakh, there is no such insurance on most of the instruments we would speak about from here onwards.

RBI Bonds, NSC’s and other instruments through post office

All of these are more or less like the Term Deposits offered by Banks. The main problem is liquidity. They are not as liquid as Term Deposits. These deposits are assured by the government of India. You could also get loans against these instruments.

Depending on your needs you can look at these different options. Please note the above options are only for your short term needs.