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How do I invest for an expense coming up in a year ?
Goal : I have an expense coming up in 1 year’s time. Instead of just keeping aside the money in a regular savings account I want to invest it in a safe instrument. Target being capital protection and making sure I have the money when I need.
Let’s say, for some gentlemen it could be, the AMD Ryzen 9 5900x and a compatible mother board. Lets peg the expense to about 1 lakh INR.
Safe instruments, that I know of
- RD
- Money Market Fund
- Liquid Fund
How does RD work ?
- You deposit a fixed amount every month and at the end of tenure you get back the principal that you have deposited plus some interest.
- Each bank has its own minimum and maximum limits on how much you can deposit and the tenure of your deposit.
- And you have to pay tax on the interest.
- You need to add the interest income as ‘income from other sources’ when you file your IT returns.
- TDS will be deducted on interest on recurring deposits if the amount exceeds INR 10000.
- Usual TDS is marked at 10 %.
- If PAN is not submitted with the bank then 20%.
- If you do not want the TDS to be deducted and plan to add it to your ITR as ‘income from other sources’, you need to submit the Form 15G with the bank.
- Premature withdrawal has penalty and it totally depends on the bank. Make sure you read up on this before starting an RD.
- Missing out on tenures has its own penalty. This isalso completely dependens on the bank.
- Also, keep an eye on the “maturity instructions”. This is what the bank will do when your tenure is complete. Some banks just renew the tenure and keep the money for themselves. Also, just to screw with you, they will let you change the maturity instruction only for the next tenure. Not the current one. So your money is locked away.
- Its quite easy to start an RD. Just open your internet banking portal and look for deposits. There could be a bunch of products under this section, just ignore all of them and stick to regular old RD.
- The fine prints are usually tucked in under the rug just to mess with you. Make sure you understand every thing before you start an RD.
You can check out their calculators here:
How does a Money Market Fund work ?
- You can buy any amount at any time you want. No fixed commitments on the amount or the tenure.
- You can sell the mutual fund and get back your money any time you want.
- Whenever you buy, you are buying a certain number of units (pieces) of the mutual fund, depending on the price of the mutual fund that day.
- The price of a unit of mutual fund is called its NAV.
- When you sell, you can sell a certain number of units to redeem your money. Or you can also redeem a certain amount of money depending on your need and not think about the no of units being sold.
- Your final profit or loss will be the difference in the price of the units when you sell all your mutual find units.
- Since it is market linked, there is no guarantee of any returns. A reasonable expectation, based on the previous performance could be of 6.5 to 7 %
- Recommended for goals that are at least 1 year away.
- Taxation is only at the time of withdrawal, depending on the holding period.
- When held for less than 3 years STCG ( Short Term Capital Gain ) tax is applicable as per your tax slab. The profit from this will get added to your income for the year and then tax will be calculated.
- LTCG ( Long Term Capital Gain ) tax at 20% with indexation benefit when held for more than 3 years. This amount is very small, negligible in fact.
One such MF : ICICI Prudential Money Market Fund
How does a Liquid Fund work ?
- All the rules for deposit, withdrawal and taxation is same as the Money Market Fund.
- The difference comes in what exactly does the mutual fund company do with your money to generate that wealth.
- Compared to Money market, Liquid funds are safer ( in some ways ), but are more suitable for longer durations, say at least 3 years.
One such MF : Parag Parikh Liquid Fund
Comparing these instruments to, the laziest option of leaving it in your savings account.
Savings account interest rate depends on your bank, the type of savings account you have and may also depend on the balance in your account. You need to check your particular savings account to be sure.
TLDR : Start an RD (in any other bank except CITI).
Sidenote : Screw Medium for it apathy for Tables and general lackluster editing support.
