Where should you park your surplus funds?

Do you have surplus funds? Did you received a refund, or a bonus in your account? You want to invest, but only for a short-time? You also want them to stay liquid i.e. be available as ready cash at will. In that case, we have some handy short-term investment options for you. While the returns might not be very high, you can safely park your funds for a period of less than 12 months here. Financial planner Sanjeev Dawar says that it is important to prioritize investment protection, rather than focusing on high returns, especially when you are investing for less than a year. In such a case, fixed income products can be a better alternative. Some funds like liquid funds and ultra-short term funds are well-suited for investment for a short duration. They are market-linked and offer stable returns.

They also offer better returns as compared to bank fixed deposits. You can also withdraw your funds any time. In fact, you won’t have to pay any exit load if you make withdrawal after a week.

You can also withdraw your funds, either completely or partially, within a day or two of making the transaction.

Let’s understand about these funds in detail:

Liquid funds are debt funds that invest in treasury bills, certificates of deposits and other securities with good credit history. These securities mature within 91 days or 3 months. They also hold at least 20% of all their assets in cash and cash-like instruments, to meet instant payout demands.

One of the funds, the Aditya Birla Sun Life Liquid Fund, has generated 3.56% returns over the last 6 months. All major liquid funds have delivered annual returns in the range of 6.73-6.83%.
Investing in liquid funds is ideal when the interest rates are rising, like was the case till recently. These funds are not affected by any long-term changes in interest rates. Redemption in these funds is processed instantly, or within one day, in most cases.

Arbitrage Funds:

Financial planner Shifalee Satsangee notes that arbitrage funds can also be considered apart from liquid and ultra short term funds for a short term time horizon since they are more tax efficient than debt funds

These funds are generally considered low-risk for investors.
They make money by simultaneously buying and selling in the derivatives and cash (spot) markets.

While transactions are settled i.e. locked in immediately in spot markets, they are promised or locked for a future date in the derivatives market, with the price pre-determined today

The difference in price levels of these two markets yields profits or losses for the fund.
Let’s understand this through an example. A fund purchased 500 shares, worth Rs 50 each in the spot market. The total comes to Rs 25,000. At the same time, it also sold these 500 shares in the futures market at Rs 60, which means the fund earned Rs 30,000. This means the fund gained Rs 5,000 in the whole transaction.

Now, if this share’s price falls to Rs 40 in the spot market, you’d imagine the fund is in losses. But, if, at the same time, its prices rise in the derivatives market to Rs 70/share, the fund will still rake in profits.

This is how arbitrage funds make the best of both markets. However, they are less liquid than liquid funds.

SBI Arbitrage fund has generated 4% returns in the last 6 months, and 7.54% annually. Prominent schemes in this category have delivered annual returns between 7.3% to 7.77%
In the end, let’s talk about corporate bond funds
If you want safety like that in bank FDs, and can lock away funds for 1-2 years, you can opt for corporate bond funds
These debt funds lend only to those financially strong companies that have a solid credit rating and are hence, are unlikely to default on repayments.
Additionally, they also tend to outperform FDs in the short term.
Over the last 6 months, most corporate bond funds have generated returns over 4%. As for their annual returns, they have ranged between 7.02% to 7.89%
From a short to medium term perspective, corporate bond funds can be a good alternative.