If you are looking to reduce risk and avoid volatility, but want to park money in options other than the savings bank, pick from the following.

Debt funds

Debt funds invest in treasury bills, government securities, certificates of deposit, commercial papers, bonds and money market instruments, among others. Despite the recent debacle over IL&FS that exposed short-term debt funds to unexpected risk, market experts advise investing in these funds compared with long-term debt funds which are more sensitive to rate hikes.

Besides, these funds offer a safe place to park cash for short durations before you invest in other instruments. They also offer good diversification for short-term goals.

1. Liquid

Span: These openended funds invest in debt and money market instruments with maturity duration of less than 91 days.

Category Avg return: 6.68%

Why invest in it?

For building a contingency fund. To park any sudden influx of cash.

2. Ultra short duration

Span: These invest in debt and money market instruments with the maturity duration between three and six months.

Category avg return: 5.78%

Why invest in it?

To carry out systematic transfer from debt to equity funds.

3. Low duration

Span: These invest in debt and money market instruments with the maturity duration between six and 12 months.

Category avg return: 6.20%

Why invest in it?

For contigency corpus and systematic transfer or withdrawal.

4. Money market

Span: These invest in money market instruments with the maturity duration of up to one year.

Category avg return: 6.79%

Why invest in it?

In a volatile market, you can ensure safety by removing from equity and parking in these funds.

5. Short duration

Span: These invest in debt and money market instruments with the maturity duration between one and three years.

Category avg return: 4.41%

Why invest in it?

To build corpus for short-term goals of three to four years.

Data source: Value Research. Data as on 25 Oct 2018.

Other options

If you are not comfortable with market-linked returns and don’t want to invest in debt funds, there are other fixed income options, including bank and post office deposits which offer short-term investing options. These offer higher interest rates than savings accounts and safety of capital for up to a year.

1. Sweep-in fixed deposit

Span: In this account, any excess amount above a stipulated threshold is shifted to a fixed deposit for at least one year.

Interest rate: Same as those for fixed deposits.

Minimum investment: Most banks require an FD of Rs 25,000-1 lakh, or a minimum balance of similar amount. It can vary for different banks.

Taxation: If interest earned is more than Rs 10,000 a year, tax is deducted at 10%. Interest income in FD is fully taxable.

2. Recurring deposit

Span: The short deposit terms are usually six months to one year, but can go up to 10 years. Premature and mid-term withdrawals are not allowed.

Interest rate: 4.5-7.9% per annum

Minimum investment: A recurring deposit can be started with as low an amount as Rs 10.

Taxation: If interest earned is more than Rs 10,000 a year, tax is deducted at source (TDS) at the rate of 10%.

3. Short-term fixed deposit

Span: The maturity term of a short-term fixed deposit ranges from 7 days to less than 12 months.

Interest rate: 3.5-6.75% per annum

Minimum investment: Minimum amount is usually Rs 100 but can vary from bank to bank. There is no upper limit.

Taxation: Interest income is fully taxable. It is added to income and taxed as per tax slab. TDS should be reconciled with the final tax liability.

4. Post office time deposit

Span: These are available for 1, 2, 3 and 5 years.

Interest rate: 6.9-7.8% per annum

Minimum investment: Rs 200 is the minimum investment while there is no upper limit.

Taxation: The tax benefit of Rs 1.5 lakh under Section 80C is available only for five-year deposits, not for shorter durations.

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