Increasing your wealth is the aim of investing for any individual. Having said that, the kind of investment you make will rely on your time horizon and particular goals. A good option if your objective is long-term would be five to seven years of time frame in stock investment.
Having said that, for example, one year or less time of investing in equities might be riskier if your time horizon is shorter because of market volatility. Hence, making smart investing choices is essential if you need to access your money within a year and don't want to keep it in a savings account.
Chirag Muni, Associate Director, Anand Rathi Wealth said, “The strategy of investment is very different if you want to invest for a short duration. The first step should be to break up the investments into buckets at different time horizons. For a three- to six-month period, we suggest opting for liquid fund and Money Market fund Whereas, for longer duration such as six to 12 months, we suggest that you opt for arbitrage funds which have better taxation advantage as well.”
Fixed Deposits: The traditional FD deposit can really be the best suitable option for an investor as interest rates are currently at cyclically high levels. So to say, there are several durations for Fixed Deposits (FDs) which range from 7 to 14 days, 30 to 45 days, and even up to a year or ten years. However, each bank has a different duration, wherein, one should do their homework to indulge in the best partnership. Furthermore, Funds from FDs can be reinvested or renewed upon maturity.
In addition, up to a limit of Rs 5 lakh for principal and interest paymentsDepositors in banks are protected by the Deposit Insurance and Credit Guarantee Corporation (DICGC). For instance, the State Bank of India (SBI) is now providing interest rates of 6.8% annually for a period of one year. While, HDFC Bank is providing a one-year interest rate of 6.6 percent.
Mutual funds or investing strategies that aim to profit on price differences (arbitrage opportunities) across similar financial products in different markets or segments are known as arbitrage funds.
Typically, these funds profit from price variations in securities traded on various stock exchanges, in the cash and derivatives markets, or in other segments of the same market. An arbitrage fund's primary goal is to generate returns while carrying a substantially smaller risk than other investment approaches. It accomplishes this by profiting from price differentials by simultaneously purchasing and selling the same or comparable assets.
Because arbitrage funds are taxed as equity, they enjoy the low tax rate, which makes them a superior option for post-tax returns. “At present, arbitrage funds are available at an attractive spread (as of September 30, 2023) making the post-tax return differential or around 1.5 per cent - two per cent per annum when compared to other debt options. This makes it a good investment choice,” Muni added.
“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” - Benjamin Graham
Harish Menon, co-founder and head of investments and product research at House of Alpha said, “I would recommend investments for less than one-year horizon in mutual fund schemes in the arbitrage fund category. Arbitrage funds earn near the risk-free rate of return by exploiting opportunities to lock certain profits by simultaneously executing transactions in the cash segment and derivatives segment. Arbitrage funds have an advantage over fixed income concerning taxation. Arbitrage funds are taxed just like equity funds @ 15 per cent/10 per cent for short-term/long-term capital gains. Returns from debt funds are taxed at a marginal rate of tax. It must be noted that most schemes in the arbitrage funds category have exit load if redemption is done within a few days.”
“An arbitrage fund is a low-risk investment option, which gives a return a similar debt product of under a year would offer. It is treated as an equity fund and hence will be taxed at 15 per cent which ensures better post-tax returns,” said Suresh Sadagopan, founder and principal of Ladder7 Financial Advisories, a financial planning firm.
Investing largely in short-term money market instruments with a residual maturity of up to 91 days is what defines a liquid fund (up to three months). These funds are intended to generate moderate returns while offering investors a high degree of liquidity and capital safety, according to Muni.
For those with substantial unused cash-seeking short-term investing possibilities, liquid funds are intended. To increase returns, think about investing in a liquid fund rather than putting extra money in a savings account.
Bonuses, earnings from the sale of capital assets, and performance-based incentives are a few examples of excess money. Investing in equity funds is another way to use liquid funds.
Investing in a liquid fund initially can be followed by a planned, methodical move of the money over time to an equity fund of your choosing.
Debt Funds: Now, if we speak of debt funds, individuals who are planning to invest for a period of time which is shorter than a year, low-duration debt funds can be their best option. In this case, your funds are invested in a variety of fixed-income instruments which will include corporate and government bonds.
So to understand, these funds ensure lower risk of interest rate altercations by adhering to SEBI regulations; resulting in a shorter average maturity period of six to twelve months. “Some categories within debt funds like ‘Money Market Funds’ can be considered for short-term investments,” Menon added.
Equity Savings Funds: In the year 2017, SEBI has launched a lucrative mutual fund scheme known as equity savings funds. With this, the regulatory body making investments in a variety of debt funds, arbitrage securities, and equities.
These funds are required by SEBI requirements to hold at least 10% of debt and at least 65% of equity in stocks. These funds invest in debt securities, equities, equity-related instruments, and arbitrage securities using hedging techniques.
Through diversifying their investments across multiple asset classes, they uphold market conditions, reduce overall risk, and preserve diversity. The fund is less vulnerable to changes in the market because of this strategy.
Mutual funds offering equities savings are a viable choice for investors who want exposure to stocks for a short to medium duration. These funds are less risky than pure equity funds since they include both debt and arbitrage opportunities. Because they have more equities than pure debt funds, they provide higher returns.
These funds offer an opportunity to experience stocks without taking on undue risk for individuals who are new to stocks but cautious about large hazards. They are appropriate for investors who want to lessen their tax burden because they have fewer tax liabilities than debt funds. They also provide an option to more conventional assets like fixed-rate bonds and recurring deposits.
