Short-term investing: Options to park your money if you have a time horizon of one year or less

• Fixed deposits serve as an attractive option for short-term investments too with guaranteed returns.
• Arbitrage funds are well-suited for investments with a horizon of one year or less due to their relatively low risk profile.
• Low duration debt funds, which invest in a diversified portfolio of fixed-income securities, are also a viable option.

While the purpose of investing is to grow your money, where you invest depends on the time horizon and specific goal. While equity investments are a great option for long term goals which are at least 5-7 years away, for a shorter duration of one year or less, investing in equity can be risky, as it will be exposed to the vagaries of the market.

If you require the amount in a year or less, and do not want to keep your money parked in a savings account, then you need to choose your investments wisely. We take a look.

Bank fixed deposits

Fixed Deposits (FDs) serve as an attractive option for investment of less than one year due to their stability and guaranteed returns. They offer a fixed interest rate, shielding investments from market volatility. With the option of flexible tenures, you can align your FD with your specific financial goals. However, FD returns may be lower than some alternate investment options.

While at present, the interest of 211 days to less than one year is 5.75% at State Bank of India (SBI), small finance banks can give an interest of up to 6.50% for a period of less than one year. It is noteworthy that interest earned on FDs is taxed at slab rates.

Arbitrage funds

Arbitrage funds operate on a unique investment strategy that capitalises on price discrepancies between cash and derivatives markets. They identify opportunities where the underlying securities are bought in the cash market while simultaneously selling equivalent futures or options contracts. The goal is to profit from the convergence of these prices over time.

These funds are well-suited for investments with a horizon of less than one year due to their relatively low risk profile. Since they primarily engage in arbitrage opportunities, they are less exposed to market fluctuations and volatility, making them a stable choice for short-term investors.

According to Value Research, arbitrage funds have given a category average return of 6.54% in the last one year.

Arbitrage funds do not have a credit risk. “They are also tax efficient. For a short period of time the taxation of equities is 15% whereas in debt, individuals have to pay the tax as per their tax bracket where some individuals can pay up to 30% tax,” says Soumya Sarkar, Co-Founder, Wealth Redefine, a mutual fund distribution firm.

Arbitrage funds are taxed similarly to equity funds. When held for less than a year, any gains are categorised as short-term capital gains (STCG), subject to a 15% tax rate and thus they are more tax efficient than FDs and debt funds.

Debt funds

Low duration debt funds are a viable option for investments with a horizon of less than one year. They invest in a diversified portfolio of fixed-income securities such as government bonds, corporate bonds, and money market instruments. These funds maintain a shorter average maturity period, between six months to twelve months (according to SEBI rules), which helps mitigate interest rate risks.

They aim to provide investors with stable returns while preserving capital, making them suitable for those with a short investment horizon and a preference for lower risk. “Right now given where the yields are, one could look to get around 6.5% - 7.25% return on low duration funds. Obviously these returns are not guaranteed like a bank FD," says Deepak Gagrani, Founder of MADHUBAN FINVEST, a financial services firm. According to Value Research low duration debt funds have given a return of 6.53% in the last one year.

One also needs to understand the tax aspect. “The taxation would be something very similar to a bank FD. It will be based on the tax slab,” says Gagrani.

Equity savings fund

Equity savings funds, a hybrid investment option, allocate funds into equity, debt, and arbitrage segments to balance potential returns with risk management. “In equity savings funds the proportion of debt is quite high and equity proportion is low. It has 70-80% in debt and the remaining in equity, so it is a conservative fund,” says Sarkar.

With lower volatility compared to pure equity funds, they mitigate market fluctuations, making them a favourable choice for those seeking balanced, relatively stable short-term investments. However, it's crucial to align investments with individual financial goals and risk tolerance for the best results.

While the debt portion gives around 6%-7% return, the overall returns go up due to the equity portion. According to Value Research, equity savings funds have given a category average return of 9.14 % in the last one year. In the case of FDs, you can withdraw the funds on the day the FD matures, but in case of the mutual funds mentioned above, it may take one to three business days for the funds to be credited to your account after you submit a redemption request.