Interest rate have been softening and given the current macro-economic situation when inflation has remained high and credit offtake has also been on the lower side and with immense liquidity in the system, banks on most conservative avenues may not be pushed to drive interest rate higher any time soon.
And so while beating inflation from your investment can be one concern, you given the uncertainty at hand due to Covid 19 pandemic should also aim keeping your capital safe at the same time. With a shorter investment horizon of 1-2 years your investments needs to be highly liquid too:
Here are suggested investments:
1. Banking PSU mutual funds:
These are open-ended debt funds and invest in debt-securities of banks, PSUs as well as public financial institutions classified by the SEBI. Instruments include debt, debentures as well as certificate of deposits (CDs) that are of high liquidity and low average maturity. Before the category was also known as short term or incThese are open-ended debt funds and invest in debt-securities of banks, PSUs as well as public financial institutions classified by the SEBI. Instruments include debt, debentures as well as certificate of deposits (CDs) that are of high liquidity and low average maturity. Before the category was also known as short term or income funds. And as the interest rate continue to decline on FDs with the latest FD rate on SBI deposit of 4.9% for 1-year term, these funds are a highly viable option.
Also know further details on Banking and PSU Bonds here
2. Short term or Short duration mutual funds:
These are debt funds that lend to corporate for a period of 1-3 years. And invest only in good quality corporate that have a track record of repaying the loan in a timely manner as well as can amass sufficient cash from their day to day business operations. In the last one-year some of these funds have returns over 10% in the last one year.
As per the ET recommendation report, HDFC Short Term Debt Fund has led with returns of 11.23% in the last one year.
3. Post office term deposit of 1-2 years:
One can be assure of their invested capital by parking in post office term deposit of 1, 2 , 3 and 5 years. Interest pay-out on these are annual. Pre-mature withdrawal is not allowed before the expiry of six months. Though the redemption then shall be at a lower rate. Currently these deposits fetch for 1, 2 and 3 year fetches 5.5% return while that on 5 years term deposit is 6.7% and it qualifies for tax deduction as part of Section 80C.
Here the interest is computed quarterly but payable only annually with interest being added to the investors' total income.
4. Savings Account:
Savings banks account is the highly liquid investment and for building up the contingency funds people can park their extra funds into bank savings account. Currently some of the banks are offering a higher return than fixed deposits say for instance IDFC First bank for balance over Rs. 1 lakh is offering interest rate of 7% per annum.
5. Tax free bonds:
Though these bonds offered by PSUs including NHAI, HUDCO, NTPC are for a longer duration, they can be easily liquidated before maturity on the stock exchanges. They offer tax free interest of 5.5%-6.5% annually. Interest income as well as the maturity proceeds from such an investment is tax free in the hands of the investor. While if the same investment was made in bank fixed deposit, the interest income on it shall be taxed as per the slab of the investor.
Say for instance for REC N1 bond maturing in December 2022, the coupon rate is 7.22% and for someone in the highest tax bracket, the yield will still go higher