What is short-term money and how does it help you?

Short-term money is the money which is left out after all expenditures have been met from the income. This unallocated money is what everyone keeps in the form of cash at home or in a savings bank account.

May 18, 2018 10:05 IST India Infoline News Service

We can't deny the fact that money is one of the most valuable resources in today's world. We're all aware of how difficult it is to earn money and it is even harder to save it. PT Barnum, a statesman from America, has said, "Money is a terrible master but an excellent servant." Therefore, a wise person who manages his money efficiently can utilize it in a highly effective way. Before understanding short-term money, we need to understand how to allocate and basket the money we earn. The following baskets can be used to manage money:
 
  
Short-term money is the money which is left out after all expenditures have been met from the income. This unallocated money is what everyone keeps in the form of cash at home or in a savings bank account. It is usually used for:
  • Contingencies
  • For the sake of liquidity
  • Fear of erosion in capital
  • For lack of short-term investment opportunities

Before we understand the investment avenues for short-term money, we need to understand inflation.
 
At present, the inflation rate in India is around 6-7%. This means if the cost of 1 Orange today is Rs100/- and assuming that the supply and the demand remain unchanged, the same orange would cost Rs105/- next year on the same date. Therefore, money loses its purchasing power due to inflation. Hence, the short-term money invested should grow on par with inflation, or at a higher rate, and should be readily redeemable in case you need it for something.
 
We will understand the quantification and investment avenues for short money in following steps:
  • Understand the month on month cash inflows and cash outflows
  • Determine the availability of short-term funds each month
  • Ascertain the number of short-term funds that would be required within one day from any requirement arising and call it extreme short-term funds

The investment strategy for extremely short-term funds:

Investment avenue

Normal rate of interest

Capital erosion

Taxes on income earned

Risk level

Liquidity

Cash in hand

No

No

NIL

Low

High

Amount in SB A/c

Interest up to 4-6%

No

Interest Earned from SB A/c is taxable at slab rates after Rs10,000/-

Low

High

The investment strategy for other than extreme short-term funds:

Investment avenue

Normal rate of interest

Capital erosion

Taxes on income earned

Risk level

Liquidity

FD’s in banks and post office

Interest up to 6-8% depending on tenure

No

Interest earned from is taxable at slab rates

Low

High

Corporate deposits with companies and bonds

Interest up to 7-9% depending on tenure

No

Low

High-Medium

Short-term mutual funds (like UTI banking & PSU Debt Fund (G)]

Interest up to 8-12% depending on tenure

Relatively nil

Short-term capital gains are taxable at slab rates.

Long-term capital gains over Rs1 lakh are taxable at 20%

Dividend from MF is exempt from tax

Low

High-Medium


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