Money has a unique characteristic, which is ‘it does not get tired from working for you.’ Therefore let’s try to exploit this feature to utilize the most out of our precious money.
On the other hand, the easiest way to lose money is to keep it idle and let inflation erode it. Inflation in India is close to 4-6% annually, hence even if your cash remains the same in number, its value keeps decreasing by approximately 5% every year. In order to prevent inflation from eroding your wealth, it is best to invest your corpus into productive assets where you could generate sufficient returns to beat inflation.
Here are 6 methods using which you can earn some extra returns on the money parked in your Current or Savings account.
1. High-Interest Savings Account
A savings bank account remains the most convenient way to obtain some additional returns from your idle money. However, not all savings accounts are the same. Most of the PSU banks offer extremely low yields on their savings accounts. Therefore, the best way to utilize this asset class is the find out the best yielding account and park your money there. There are multiple NBFC (Non-Banking Financial Corporations) and Private sector banks that offer 5-6% interest annually. Using these accounts, you can easily beat inflation and preserve your capital.
2. Auto Sweep-in Facility
Normal Fixed Deposits are good for the long term (150 to 360 days) but multiple charges are applied when you close an FD prematurely. An auto sweep facility in your savings account automatically creates an FD if the total balance of your account crosses a mentioned threshold. Moreover, there are no penalty or premature withdrawal charges in such a fixed deposit. With this, you will be able to get better returns than a savings account and no worry about maturity dates.
3. Liquid Funds
After bank account and FDs, you could utilize Liquid funds which provide similar returns as short-term FDs. Liquid Funds are extremely liquid and do not have a lock-in period associated with them. They return between 3-6% per annum depending on the underlying assets. At this place, the risk factor is low whereas the returns are equally low. Liquid funds offer better returns from savings bank accounts. The only downside to such funds is they include a small expense ratio which you will have to bear for all the benefits it offers.
4. Government Bonds
Government bonds or G-secs are one of the safest investment options when investing for the long term. Containing a sovereign guarantee eliminates the risk of losing your money in these instruments. On top of that, you get high returns ranging from 6 to 10% per annum in some G-Secs. Apart from the high yield and safety, there are some drawbacks as well. These bonds might fluctuate in value as per the interest rate in the economy. And also, these might not be most the most liquid investments when compared with the other instruments. However, if you hold any government bond till maturity, you will not have to worry about market volatility as well as liquidity.
5. Corporate Bonds & Debentures
Corporate bonds are similar to government bonds, but these are slightly riskier. Corporate bonds and debentures(NCDs) are medium-term instruments ranging from 2 to 5 years or more. As these are floated by individual companies, there is a slight chance that the company might default on the payments. To compensate for the additional risk, these offer better returns. Corporate bonds or debentures often beat any other debt instruments in terms of returns. Some of the bonds range from 9% up to 13% per annum. Although these are risky, you can minimize the risk by investing in the top AAA-rated secured debentures and also diversifying your bond investments across numerous bonds. By this, you will be able to reduce your overall risk and increase the returns.
6. Good Quality IPOs
Finally, the riskiest and most speculative investment that you can make with your idle money is applying for good-quality IPOs (Initial Public Offering). IPO investing is the riskiest form of investing out of all the methods listed here, as it is directly related to the stock markets. A good quality IPO commanding a high premium could easily fetch you 40 to 100% listing gains within a time frame of 10-12 days. While applying for a good IPO, the chances of receiving an allotment are low. Therefore, if you don’t receive an allotment, your full money is unblocked in your account without any charges. Whereas if you are lucky enough to receive an allotment. You can sell all of your shares on the day of listing and realize the gains. By this method, you can easily make 50 to 100% returns on your idle funds within an extremely brief period of time. However, investing in IPOs is risky hence you should analyze the company thoroughly before applying for it.
These were 6 of the instruments employing which you can acquire additional returns from your idle investments. Now before you run off to generate some extra cash on the sidelines, it is important to know the risk behind each of your investments. Hence evaluate your risk profile and act accordingly, only after you have done your due diligence.
However, you should remember that these should be completely separate from your regular investments. Before you park your excess money, ensure you have allocated your monthly investments and have created an emergency fund. Only after you have these in place, you can start deploying your idle funds elsewhere.
You should maintain a separate account to employ your additional funds so that it is easier to track for you.
Rest you should categorize your idle money into the short, medium as well as long term. So that you don’t have to encounter a liquidity crisis when you are in need of money.