Last updated: December 11th, 2017
Suppose you come into a substantial amount of cash that you don’t need right away. What do you do with this surplus fund? Being an informed investor, you know that you should invest it. However, with the plethora of investment options available, it can be quite challenging to choose the right investment. After all, you don’t want to lose money or make lower returns, do you? So while you take your time researching your options and deciding upon the best investment, your money sits idle in your bank account, doing nothing.
Don’t let your money sit idle
Now the worst thing you can do with your money is to let it sit idle. Money lying in your bank account is no good and slowly erodes in value due to inflation. You should take immediate measures to deploy it to buy assets.
Here is a guide on how to quickly make a decision on where to invest that surplus cash.
Decide: Long Term or Short Term
If you are sure that you will not need the funds for the next few years at least, you can invest it into equities for the long-term so that you can earn handsome returns. Equity mutual funds and stocks are your options. If you are buying stocks, do remember to do your research on the company. Spread your investment across multiple stocks and mutual funds to diversify your risks.
Equity: Long term, better returns
Now all this research can take time, and till then your money is still sitting idle in your bank account. Also, if you are not sure whether you will not need the money in the near future, you should not invest in equities. What is the next option then?
You can invest it in a fixed deposit. However, bank FDs are not very efficient. The returns are moderate at best, you lock in your money for a fixed amount of time, and the returns are taxed according to your tax slab.
Debt Mutual Funds: Better than FDs
A better option would be to invest it in a debt mutual fund or liquid fund straight away. Debt mutual funds are funds which invest in debt instruments and have short holding periods ranging from a few months to a few years. However, there is usually no lock in. Liquid funds are a type of debt fund which invest only in very short maturity instruments and can have holding periods as short as a day.
The returns from debt and liquid funds are also taxed, but you enjoy the benefits of better liquidity and higher returns than FDs. The returns are treated as capital gains and taxed according to your tax slab if the investment is for less than 3 years (short-term capital gains) or at 20% with indexation or 10% without indexation if the investment is for more than 3 years (long-term capital gains).
So while you take your time making the decision, you can park your cash in these funds and put them to work straight away. If you then decide to invest in equities, you can always redeem your units. You can also set up a STP (Systematic Transfer Plan) to an equity fund of your choice if both the funds are within the same fund house, or a combination of SWP – SIP (Systematic Withdrawal Plan – Systematic Investment Plan) if they are in different fund houses.
Do the Research
I always invest my surplus funds immediately into a liquid fund while I am figuring out what to do with it. To speed up the process, I have a ready list of the better performing liquid funds for which I do the research beforehand. If I need a part of it right away, I can always redeem some units according to my requirements. Unlike FDs, there are no penalties for early redemption. If I don’t need the funds right away, I do my research on suitable equity investment options (equity mutual funds and stocks) and invest accordingly. All the while my money is earning a decent amount of returns.
Like this post? Share it using the buttons below or to the left!
Sign up for the free newsletter.