The present interest rates offered by banks are lowest since 2012, therefore it is very important one should know where to park idle money.
Below Graph Shows the Interest rates trend in India
As per Jan 2020, Interest rates offered on savings account by most banks is between 3 to 4%. And currently, consumer inflation stands greater than 4%. Therefore, in real terms, the value of money is diminishing and becoming negative. This means, if you keep money in a savings account you are actually losing your money due to high inflation.
Below is a graph showing the trend of Consumer Inflation in India
Where to Invest Ideal Money?
There are various areas where one can invest such as
- Mutual funds
- Bank Fixed Deposits
- PPF (Public Provident Fund)
- NPS (National Pension Scheme)
- Post Office Fixed deposits
- Bonds
In this post, we will see what are the safest/risk-free avenues of investment in mutual funds.
The safest class among mutual funds is DEBT Mutual Funds.
The most important thing to note among all debt classes is that money parked is safe but not risk-free.
Consider a scenario of where an economy is heading towards recession and large companies like (Reliance Industries, HUL, Godrej Consumer) have started defaulting on a loan payment, in such cases money invested in debt funds is extremely risky and one can lose principle as well.
Categorization among Debt Mutual Funds
Now, we will discuss the safest and popular types of debt mutual funds.
Liquid Funds
These types of funds are extremely popular among investors and are often considered similar to fixed deposits. These funds invest in short term securities ranging from 1 week to 90 days, therefore, they are named as liquids funds. Short term securities namely include treasury bills, money market investments, very short-term commercial paper, etc.
Investors usually earn 2% greater than the savings account and rates vary between 5-7%.
Suited for investors having a horizon of 7 days to 1 year.
Most Popular Liquid Funds
Ultra Short Term Funds
These funds are similar to liquid funds but they generally invest in securities ranging from 90 days to 1 year. They are as liquid as Liquid funds but carry a small amount of risk greater than liquid funds.
Investors usually earn 1% more than liquid funds and rates varies between 5 to 8.5%.
Suited for investors having a horizon of 1 year to 3 years.
Most Popular Ultra Short Funds
Eg Franklin India Ultra Short Bond Fund – Super Institutional
Short Term Bonds Funds
These funds invest in bonds of maturity 1 to 5 years. These funds are best suited for investors who are looking to park their money greater than 3 years.
Investors earn greater returns than liquid funds but are volatile in a short period. In these funds, investors earn between 6 to 12%
Suited for investors having a horizon greater than 3years.
Most Popular Short Term Bond Funds
Eg ICICI Prudential Short Term Fund
References
Valueresearchonline