The short answer
For money you’ll need in six months to a year — a flat down payment, a wedding, school fees, a car — the goal is simple: keep it safe, keep it easy to get to, and earn a little more than a savings account. A liquid fund or a bank fixed deposit usually does this well. If you’re in a high tax bracket, an arbitrage fund can leave you with more after tax.
What doesn’t belong here is equity. Money you need within a year can’t afford a bad year in the markets.
Why a savings account isn’t enough
Savings accounts at large banks typically pay around 2.5% to 3% a year. Leaving ₹10 lakh there for a year while you wait for a flat to be ready gives up a noticeable amount compared with a liquid fund or FD. It’s not a fortune, but for money that’s just waiting, there’s no reason to earn less than you easily could.
Your options, side by side
| Savings account | Bank FD | Liquid fund | Arbitrage fund | |
|---|---|---|---|---|
| Typical return | Lowest | Fixed when you open it | Close to short-term interest rates | Similar to a liquid fund, varies more |
| Getting your money | Instant | Penalty if broken early | Next working day; some allow up to ₹50,000 instantly | 2–3 working days; small exit charge if withdrawn within the first few weeks |
| How it’s taxed | Interest at your slab rate | Interest at your slab rate, every year | Gains at your slab rate, only when you withdraw | 20% if held under a year; 12.5% above ₹1.25 lakh after a year |
| Best for | Day-to-day money and emergencies | When you know the exact date you’ll need it | When the date might move | The 30% tax bracket, and a year or more |
How to choose
You know exactly when you’ll need the money. If the builder wants the payment on a fixed date nine months from now, an FD for that term is simple and certain. You know what you’ll get on the day.
You’re not sure of the date. Possession dates slip and plans change. A liquid fund lets you take out money any working day, with no penalty after the first week, and you can withdraw part of it without breaking the rest. That flexibility is often worth more than a small difference in return.
You’re in the 30% tax bracket. Interest from an FD and gains from a liquid fund are both taxed at your slab rate. Arbitrage funds are taxed like equity funds: 20% on gains if you sell within a year, and 12.5% on gains above ₹1.25 lakh after a year. For someone in the 30% bracket, that can mean noticeably more money in hand, especially if you can wait a little over a year. In a lower tax bracket, the advantage shrinks or disappears.
Despite the name, arbitrage funds are low-risk. They buy shares and sell them in the futures market at the same time, earning the small price difference between the two, so they don’t depend on the market going up.
A few things to avoid
- Equity funds, even “safe-looking” large-cap funds. A 15% fall just before you need the money is a real possibility over any single year.
- Funds that promise noticeably higher returns than other short-term funds. In debt funds, higher return usually means lower-quality borrowers. Stick to liquid, overnight, money market or arbitrage funds for this kind of money.
- Very high FD rates from small or unfamiliar lenders. Bank deposits are insured only up to ₹5 lakh per person per bank. If a rate looks much better than the big banks’, ask why.
When it’s different
- It’s your emergency fund. Keep a portion — say a month’s expenses — in your savings account for instant access, and the rest in a liquid fund.
- It’s business money. Surplus cash between receivables and payments works the same way. Liquid funds are especially useful here, because you can withdraw exactly what you need, when you need it. We explain this more on our page for business owners.
- The date is more than two or three years away. Then this isn’t really short-term money, and a more balanced mix may suit it better.
CurateMyMoney is an AMFI-registered mutual fund distributor (ARN-184811). Mutual fund investments are subject to market risks. Read all scheme-related documents carefully. Tax rules mentioned are as applicable at the time of writing and may change; please check the current rules or consult a tax professional before acting.
