A great vacation depends on how much funds can be arranged without hurting one's finances. One of the best ways of doing this is by dedicating a fund for this purpose. One can park this fund in short term investment options, so that it can be liquidated anytime one chooses while earning a return reward too. While investing money for a vacation, start early to create a large corpus and focus on low risk, assured return on investment and high liquidity instruments.
Take a look at the five best short term investment options to fund your dream vacation:Bank fixed deposits
A bank fixed deposit (FD) is a safe option to invest one's funds for the short to long term. One can invest for a period of 7 days to 10 years, with interest rates varying accordingly. One can choose to have interest credited every month to the bank account or opt for interest reinvestment to fetch cumulative return.
At present, banks are offering interest rates in the range of 4 percent to 8 percent depending on the tenure one selects. Senior citizens receive an additional 0.5 percent on their deposits.
One can liquidate an FD anytime, but it is important to note that premature withdrawals result in lowering of interest income for the invested tenure by a percent. Also, interest earned on FDs are taxable as per your applicable tax slab.Sweep in FD
Sometimes it is difficult to commit to a lump sum FD amount, so investors keep their funds idle in the savings account. One can channelize such investments by starting a sweep-in FD facility. Under the sweep-in FD facility, once the balance in a bank account crosses a certain threshold set by you, the excess amount is automatically converted into an FD. Later, if your account balance is low and you try to withdraw money from your bank account or a cheque is presented for clearing, the sweep-in FD is liquidated by that much amount and the remaining FD is not disturbed. One has the choice to fix the tenure. However, most banks provide a fixed tenure of 12 months. In case one wants to withdraw before the tenure ends, it will invite a fine of around 0.5-1 percent of the interest payable.
Return on the sweep-in FD is usually the same as a normal FD account. On this investment, one is taxed as per the existing tax slab. If you earn interest above Rs 10,000 a year, the bank will deduct tax deductible at source.Recurring deposits
If you do not have a big lump sum amount to invest, one can start accumulating money by investing through recurring deposits. Under an RD, a fixed amount is deducted from your bank account at regular intervals. One can invest in an RD for a tenure ranging from 6 months to 10 years. One receives similar interest benefits like that on an FD for the respective tenure.
Like an FD, if one withdraw an RD before completion of the tenure, banks may charge a penalty as per the prescribed rate. One can invest in an RD and create a corpus for your vacation without taking much risk and receive a low to moderate return.Corporate fixed deposits
Corporate FDs are similar to bank FDs, but carry higher risk, therefore the interest rate offered is typically 1-2 percent higher than bank FDs. Corporate FDs comes with a minimum tenure of 1 year. The liquidity aspect may not be as attractive as that of the bank FDs. Companies allow premature withdrawals at its discretion and may charge a penalty as per the applicable rate.
One can invest in corporate FDs to diversify their investments and maximise returns. The interest earned through this investment is added to an individual’s income. If the interest earned is above Rs 5,000 per year, TDS is deducted.Liquid mutual funds
Liquid mutual funds are debt-oriented schemes. One can park their surplus funds in a liquid mutual fund and earn low-risk returns in the short to medium term. One can withdraw the funds when needed without having to worry about exit load. It also offers an easy entry and exit route.
Return from liquid funds are not fixed. Subject to the prevailing market condition, one can earn a return of around 6-7.5 percent per annum.
One can use a liquid fund investment to park business funds or short term lump sum amounts to earn attractive returns.
Liquid funds are subject to capital gains, which is taxable. One is taxed based on how long one stays invested in a fund. Short-term capital gains (STCG) are levied if you exit within 3 years, while investments over 3 years attract long-term capital gains (LTCG).High interest earning savings accounts
Many banks offer attractive interest rates on savings account. The interest one earns from such an account is around 6-7 percent per annum (subject to minimum balance requirements). A savings account allows one to deposit funds or withdraw it anytime. So, one doesn’t need to lock in funds to earn a high return. Interest up to a lakh earned on a savings account in a financial year is exempted from tax. One can use these high interest savings accounts to accumulate funds for your vacation and even to invest in mutual funds, sweep-in FDs, regular FDs or an RD account and ensure high liquidity while earning attractive returns.(The writer is CEO, BankBazaar.com)