I used to keep all short term goal funds in FDs (ranging from 6 months to 1 year). But the problem with the FD is that there is a penalty (usually 1%) for premature withdrawal (except few banks e.g. IDBI does not levy penalty). Plus TDS is also deducted (if interest goes beyond Rs. 10000 in a FY).
Thanks for your site and articles (including the one on short term funds), I came across liquid and arbitrage funds which are relatively risk-free but still more riskier than FDs. I was thinking of dividing the short term cash in FD, liquid fund and pure arbitrage funds (not arbitrage plus funds) with monthly dividend option may be in the ratio of 50% (FD), 25%(liquid fund) and 25% (arbitrage funds) based on following points (correct me if any of information is not correct):
– Liquid funds have given monthly returns at around 5.5-5.8% for monthly dividend option with 28.3250% as DDT whereas current monthly FD rates are at 6% (which is 4.15% after taxes for 30% tax bracket, 4.76% for 20% and 5.38% for 10%).
– No penalty or TDS for liquid funds. There is a penalty of around 0.25% for arbitrage funds if redeemed within 30 days and it may take more time to redeem arbitrage fund.
– No DDT on arbitrage fund dividend and no tax if kept for more than a year.
I want to know your opinion on:
– Is it right thing to divide cash across FD, liquid and arbitrage fund ?
– If yes, what should be the percentage ?
I want to thank you for your site and unbiased articles. And because of this, I could finally take a decision to start SIP in equity mutual funds with long term goals this year.
Da-I appreciate your working and arriving at decision. But consider below points before jump into.
- When your requirement is short term requirement, then the highest importance must be towards preserve your principal, liquidity and lesser tax outgo.
- I fully agree that if you are into 30% tax bracket then opting dividend option will be better than opting growth option. But stick to liquid funds or ultra short term funds. Don’t go beyond that.
- But selecting Arbitrage Funds for less than a year or equal to year may not be a good idea. Because in some instances, arbitrage funds provided some negative returns also. However, if holding period is more than a year, then think of Arbitrage funds. Also, dividends may be tax-free. But they will not provide regular dividends unlike debt funds.
- Avoiding TDS does not mean that avoiding your tax liability. You have to pay the tax on such incomes according to taxation. Hence, don’t concentrate too much on TDS factor.
In my view, if your holding period is less than a year, I suggest you to stick to FDs and Liquid Funds. No Arbitrage Funds.
What should be the percentage between FDs and liquid fund ?Thanks.
Da-Keep it as 50:50.
Thanks a lot for clarification.