The Smart investor’s guide to parking money in uncertain times

Finding a safe place to park your funds can be challenging, especially in uncertain times. With upcoming elections, high market volatility, potential interest rate cuts, and global instability, many people are cautious about investing. If you share these concerns, this article will be helpful. We've compiled a list of safe places and strategies for parking your money during these unpredictable periods. Read on to discover effective options for safeguarding your finances.

The Good Old Bank Fixed Deposit

First and foremost, let’s consider the good old bank fixed deposit (FD). Many banks offer a high interest rate on FDs, making them an optimal way to park money for a short period, say 6 to 12 months. Your money is safe especially if you choose the top nationalised banks or top private banks and it is liquid because you can always break a deposit if needed. You get a fixed interest rate, though this interest amount is taxable as per your marginal tax rate.

Corporate Fixed Deposits

Another popular option, especially among senior citizens, is corporate fixed deposits. These are offered by NBFCs like Bajaj Finance and housing loan companies like LIC Housing. They also include deposits from public sector undertakings like NHAI and NTPC, which can be bought from the secondary market using your brokerage account. These deposits offer slightly better rates compared to bank FDs, but ensure you invest in AAA-rated papers and understand the tenure, yield, and taxation involved.

Post-Office Time Deposits

Post-office time deposits are another secure alternative. These can be opened for a minimum of one year and are super secure since they are guaranteed by the government of India. The interest rates they offer are close to what banks provide. Considering the subtle variations between these three options, one has to choose for a 6, 9, or 12-month period.

Debt Mutual Funds

Debt mutual funds come in different shapes and sizes, so figuring out which one works best can be tricky. The selection criteria should focus on safety and interest rate sensitivity. Instruments like liquid funds, overnight funds, money market funds, and government bonds have lower credit risk. Short-duration funds are less affected by changes in RBI’s repo rates. Though the long-term capital gains benefit is no longer available, short-duration schemes like the money market and ultra-short-duration funds are sufficient for parking money for 6 to 12 months.

NPS Tier II Account

An uncommon yet viable option is using your NPS Tier 2 account to keep some money aside. While the taxation is similar to that of FDs and debt mutual funds, there is no lock-in period, no exit load, no minimum balance requirement, and low expense ratios. Withdrawals are credited within three working days. However, always consider the safety and interest rate sensitivity of the scheme you are getting into.

For example, the SBI Pension Funds’ Tier 2 Class C section has 82% of its assets in AAA-rated instruments, which indicates a safe credit profile.

Arbitrage Funds

Arbitrage funds are another interesting parking lot for your money. These equity mutual funds aim to exploit price differences in the cash and futures markets. By leveraging the price differences, arbitrage funds can generate returns irrespective of market movements. Historically, these funds have offered returns of 8-9% when spreads are high and 4-5% when spreads narrow. They are generally considered low-risk and suitable for a 9 to 12-month period, with relatively tax-efficient returns.

Conservative Hybrid Funds

Moving on to options with a bit of equity, conservative hybrid funds are a mix of debt and equity, with 75-90% in debt and the rest in equities. These funds tend to deliver 6-11% returns, but the taxation is debt-oriented, meaning capital gains are taxed as per the investor’s marginal tax rate.

Equity Savings Funds

Equity savings funds use a mix of equity, debt, and arbitrage in equal proportions, offering decent downside protection and inflation-beating returns with equity-oriented taxation. While market risks are inherent, these funds have a higher return range (4-15%) compared to conservative hybrid funds. If the uncertainty is balanced (50-50), equity savings funds can be considered.

Balanced Advantage Funds

Finally, balanced advantage funds, or dynamic asset allocation funds, invest in a mix of equity and debt. These funds adjust their portfolio based on market valuations, increasing equity exposure when markets are undervalued and shifting towards debt when valuations are high. The returns are sharper than those of conservative hybrid or equity savings funds. For moderately risk-tolerant individuals, these funds are suitable for long-term parking of money (3 to 5 years).

Conclusion

These above options are standard instruments for parking money during uncertain times. While there are more complex options like futures, options, or stable assets like REITs and INVITs, retail investors don’t need to go down that path. SIP (systematic investment plan) and STP (systematic transfer plan) are effective methods for deploying parked money once there is market clarity. SIP can move money from a bank account into a fund, while STP can move money from a debt or hybrid fund into an equity fund. Doing an STP from an equity savings fund into a pure-equity fund is becoming more comfortable, as it offers better post-tax returns even if the equity markets remain volatile.

In uncertain times, diversifying across safe and moderately risky investment options can protect your capital and provide decent returns. Evaluating the safety, interest rate sensitivity, and taxation of each option is crucial for optimal money management.