Jahnvi (name changed), a salaried employee in Mumbai, is set to get married in January 2025. She is planning to fund her wedding with some help from her brother. But she now has only nine months to fix the funding part.
Keeping all savings for the wedding goal in Fixed Deposit (FD) is one of the best options for her. But Jahnvi is wondering if there is something else she can explore.
Before we get into finding if there is really any other option for Jahnvi, let’s look at her current financial situation.
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Jahnvi’s financials
Jahnvi is currently earning Rs 50,000 per month. But her monthly expense is just around Rs 10,000. This means, she can save up to Rs 40,000 per month till January 2025. She has already accumulated Rs 4 lakh through three Fixed Deposit (FD) accounts.
Going by above details, if she saves Rs 40,000 per month in FD, she can accumulate only up to Rs 7.6 lakh. She will clearly fall short of the target amount by Rs 12 lakh. But Jahnvi has an ace in the family!
Jahnvi says her brother Akhil (name changed) is expected to support with around Rs 8-10 lakh. But there is a problem. Even if Akhil gives her Rs 10 lakh, she will still fall short by around Rs 2.4 lakh. And there is no investment method that can guarantee her an additional Rs 2.4 lakh by investing Rs 40,000 per month in nine months. Only thing she can do is try to reach as close as possible to the target amount.
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What else can she do?
When planning to save for a short-term goal, an investor should not focus on returns. The ideal requirement in such cases is liquidity without risks. As Jahnvi is saving for an immediate goal, she needs to ensure that her capital is not exposed to market risks. As her wedding plan will be jeopardised if anything goes wrong in the market.
The best options, other than FD, she can explore are some fixed income options. However, she shouldn’t be bothered about the 0.5% or 1% extra returns that might come by investing in other fixed income options. Rather, she should focus only on making sure that this investment is liquid i.e. the cash amount should be available when required.
Are there options other than FD for her?
Jahnvi could have explored Arbitrage Funds if she had more time. As time is a luxury in her case, the best option, other than FD, that she can explore is parking her savings in a money market fund or a low duration fund or a liquid fund. Because these options will not only provide more liquidity than FD but also likely better returns for such a short duration.
Currently, banks are offering around 6% annual interest on deposits for up to 9 months. In contrast, fixed income mutual fund options mentioned above can give her returns over 7%.
As interest rates are expected to go down over the next 9-12 months, Jahnvi can get a slight kicker on capital gains by doing fixed income investing through mutual funds.
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Can she go for arbitrage funds?
When investing for more than a year without compromising on liquidity, an investor can explore the arbitrage mutual fund option. Compared to Fixed Deposit, an arbitrage fund is more tax-efficient and offers better liquidity.
If Jahnvi had to invest for a longer term, she could have gone for arbitrage mutual funds because that would have been a slightly more tax efficient and higher liquidity option. But she has just 9 months to invest.
How Arbitrage Funds work
Arbitrage funds take advantage of the slight difference in prices of stocks in different markets. Returns from these funds are taxed as equity as they buy stock in the cash market (stock market) and sell in the futures market. These funds take advantage of buying and selling opportunities in a very short duration. As the buying and selling in these funds happen so quickly, the risk is significantly lower.
These funds are taxed like equity but offer risks and returns like debt liquid funds. In other words, capital gains from investing in arbitrage funds are taxed like equity funds (10% on capital gains over Rs 1 lakh after 1 year). However, risks associated with these funds are lower than equity funds.
But Jahnvi has to invest for 9 months only. The capital gains in her case would be taxed as short-term gains at 15%. However, this wouldn’t matter much as her annual income is just Rs 6 lakh and income up to Rs 7 lakh is already tax-free under the new regime.
Experts suggest that instead of arbitrage funds, she should go for a money market fund or low duration fund or a liquid fund at this point of time because they will give her liquidity also. And she will also be able to better the FD returns.
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The above article is based on a recent Q&A session during ‘The 1% Club Unfiltered’ show with Sharan Hegde, CEO, The 1% Club, and Kirtan Shah, Managing Director- Private Wealth, Credence Family Office. The 1% Club Unfiltered is an exclusive show dedicated to members of The 1% Club. During this one of its kind monthly event, Sharan and top industry experts solve financial queries of the club members Live.
Disclaimer: The personal finance suggestions shared during The 1% Club Show are for educational purposes only. Readers are advised to consult a SEBI-registered financial advisor to find a solution for their individual financial queries.
