Where can I park my idle cash?

By Mohasin Athanikar |  03-02-22 | 

I have some money sitting idle in my savings account. Where can I park this cash? I want a fund with little to no risk, and hopefully better returns when compared to a banks savings account.

From your query, it appears that this is your Emergency Fund.

To park your emergency corpus and/or any idle cash needed to meet near-term expenses, you can consider investing into money-market funds such as liquid and overnight funds. Safety and liquidity are the key here, while returns take a back seat.

Liquid funds invest into short-term instruments certificates of deposits, commercial papers, T-bills, repos, etc. The average maturity of such funds is typically around 1-2 months. On the other hand, overnight funds (as the name suggests) invest into overnight instruments such as reverse repo, TREPS, etc. Also, overnight funds have no exit load while liquid funds have a nominal graded exit load up to 6 days (0.007% on day 1). Any redemptions are typically credited to your account in T+1 business days.

To obtain higher yield, you may invest in ultra-short term, low duration and money market funds. However, these involve relatively higher credit and duration risk. One should also evaluate the expense ratio of the underlying fund before investing, as lower expense ratio funds result in higher returns assuming other fund attributes are similar.

Given the very short tenor of the underlying instruments, the YTMs of these funds closely track interest rates in the money markets as the maturity proceeds of underlying instruments are rolled over and invested at the then prevailing market rates. Currently, the yields are low due to low short-term borrowing costs amid surplus liquidity conditions. As the economy picks steam, interest rates are likely to move upwards and so will the yields (interest rates) offered by such funds.

Based on your liquidity needs, you may also look to invest into Arbitrage schemes (horizon of 3 to 6 months) which typically deliver returns close to that of liquid funds but offer benefit of favourable taxation leading to higher post-tax returns. For holding periods of up to 1 year, the  short-term capital gains are taxed at 15% (excluding cess and surcharge, if applicable), as compared to the 30% tax rate for liquid (and other debt funds) for investors in the highest tax bracket. For holding period of between 1 to 3 years, gains in arbitrage funds are taxed at only 10% (only excess gains above Rs 1 lakh are taxed), compared to 30% for the highest tax bracket investor.

However, one should be cognizant of the risks in Arbitrage funds which can lead to these funds delivering negative returns for very short periods. Also, the fixed-income portion of such funds needs to be carefully assessed with regards to the underlying credit and duration risk.

Here is some additional reading that will help you:

Debt Fund or Fixed Deposit?

Can I invest my Emergency Fund in arbitrage?

4 things an Emergency Fund is not

Registered readers can post their queries by accessing the Ask Morningstar tab. Our team will answer SELECT queries ONLY relating to mutual funds and portfolio planning.

Add a Comment
Please login or register to post a comment.
Mutual Fund Tools
Ask Morningstar