“ABC Co. to lay off 600 employees.”
“PQR Bank hands pink slips to the employees in the retail business.”
Considering the focus of the companies on reducing and rationalizing the costs, these headlines are highly common these days. While emotional challenges don’t fade off easily in such situations, one can take care of the financial challenges if one plans well for the rainy day and prepares an emergency corpus. It further assumes an importance that such fund does not remain idle and lose its purchasing power while at the same time, also remains liquid for any uncertain times.
Indian Financial market has evolved well to offer a variety of fixed income options, without much credit risk. Here is a brief synopsis of the fixed income investment options present where one can invest the funds, offering liquidity and reasonable returns both:
- Savings Account – This is the most commonly resorted- to option to accumulate funds. For a traditional saver, the savings accounts with commercial banks provide the convenience of anytime withdrawal and hence, turn out to be the best place to park the funds. However, since most of the banks offer 4% savings interest, this is also one of the lowest yielding options.
- Fixed Deposits–As the name makes it clear, these are the deposits made with the banks for a fixed tenor. Normally, such deposits are still withdrawable before the completion of the tenor, though at the cost of lower interest than what has been contracted, commonly referred to as the premature withdrawal penalty. These carry higher interest than the savings account, but at the same time, tend to be less liquid than the funds in a savings account.
- Recurring Deposit–Recurring deposit is a variant of fixed deposit, wherein funds are contracted to be deposited for a fixed tenor, but the deposit is made in periodical installments. It is similar to fixed deposits in all other aspects.
- Liquid Funds – Liquid funds are a special category of mutual funds which invest primarily in debt and money market securities with a maturity of upto 91 days only. Liquid funds derive their nomenclature from the liquidity they offer for the funds invested since these provide faster redemption proceeds than regular equity or debt mutual funds. Liquid funds generally tend to offer the returns better than or at par with the term deposits rates offered by banks while additionally offering liquidity similar to Savings Accounts.
- Non Convertible Debentures (NCDs) – NCDs are the securities issued by various corporate entities and are susceptible to credit risk and interest rate risk. Credit risk refers to the risk of default by the issuing company. Interest rate risk denotes that when the interest rates rise, the price/ market value of the funds decreases and vice versa.
- Debt Mutual Funds – Debt mutual funds invest their corpus into debt instruments/ NCDs of other companies and hence, offer better returns than the term deposits. However, since the portfolio consists of the listed/ quoted debt securities, the interest rate risk also comes along these funds.
The choice for the suitable investment option in the basket of fixed income options depends entirely on the preference for liquidity and higher returns. One must indeed plan well to save for the rainy day and at the same time, helping the money yield smarter by making an informed decision.