One of the major factors which helps determine whether or not one ends up enjoying a vacation is the manner in which the funds for the holiday were arranged. If the funds were gathered without it adversely affecting one’s finances, then the vacation often turns out to be a great one.
A great way to arrange funds for a vacation (without it adversely affecting one’s finances) is to create a dedicated fund for it. Such funds can be parked in varied investment instruments over a short term, thereby ensuring that they can be easily liquidated while simultaneously earning handsome returns on the investment. When you begin planning the investment for a vacation, it is important to begin early so that a big corpus can be created. It is also necessary to invest in instruments that offer guaranteed returns, are low risk, and are highly liquid.
Presented below are the top 5 short-run vacation investment instruments that can help save money for a top-notch vacation.
- Fixed deposits in banks (FDs)
An FD or a bank fixed deposit is a secure and safe way to park one’s money (a lump sum) for the short-term or for a long-term. It is possible to have an FD investment for only 7 days till 10 years. The interest rates on such FDs vary as per the period of investment. The interest earned on the FD can be diverted to a savings account each month, or it can be reinvested in the FD to gain cumulative yields.
Currently, the interest rates offered by varied banks for FDs fall in the range between 4% and 8%, as per the FD tenure chosen by the investor. An extra 0.5 percent is offered to senior citizens for their FD savings.
An investor can liquidate a bank fixed deposit whenever he/she wants to. It is however important to remember that the income earned via interest from FDs gets reduced by 1 percent due to withdrawals before the FD matures. Additionally, the interest gained on fixed deposits gets taxed according to the tax bracket of the investor.
- Recurring bank deposits (RD)
People who do not a large lump sum for investment can begin saving money by making small investments through recurring bank deposits. In a recurring deposit bank account, a fixed sum is periodically taken out from your savings (or other) bank account and transferred to the RD account. Investors can place their monies into a recurring deposit for a minimum of 6 months to a maximum of 10 years. The interest earned on RDs is almost similar to that earned via FD investments, as per the respective time periods.
As is the case with FDs, withdrawals from a recurring deposit before its term gets completed results in a penalty charge imposed by the bank. This penalty is as per the rate mentioned in the Terms and Conditions. It is possible to create a big enough corpus for a fine vacation by investing in an RD, without any big underlying risks and earning a moderate to low rate of returns.
- Sweep-in bank fixed deposits
It is sometimes not easy for people to commit a large chunk of their savings into a fixed deposit account. Hence, their funds remain idle earning basic interest in a savings bank account. It is possible for people to earn higher interests on such funds in savings account by opting for a sweep-in FD facility. In this facility offered by banks, after the balance in a savings account reaches a certain level (set by the bank account holder) of savings, the extra amount gets automatically transferred into an FD.
Later, whenever the balance in the savings bank account gets low and the account holder tries to take out money from it, or if a cheque is sent for clearing, then the money that is short gets taken from the sweep-in FD account and the rest of the money continues to remain in the FD. The tenure of sweep-in FD can be fixed by an investor, but most banks offer a fixed term of 12 months. If an investors needs to take out money from the sweep-in FD facility before the end of the tenure, then a penalty ranging from 0.5 to 1 percent is charged by the bank on the interest payable.
A sweep-in FD typically offers the same returns as that provided by a normal bank fixed deposit account. The taxation on sweep-in FD accounts is according to the tax bracket of the investor. In case the interest earned per year is over INR 10,000, then the TDS (tax deductible at source) is deducted by the bank.
- Corporate FDs
Corporate fixed deposits are just like the fixed deposits in banks. They however come with increased risk and hence offer a rate of interest that is higher than the banks’ FD interest rate by 1 to 2 percent. The minimum tenure for corporate fixed deposits is one year. These investment instruments are also not as liquid as the bank FDs. Premature withdrawals may be permitted by some companies as per their prudence, but they may impose a fine as per the rate applicable.
Investors may put in their money into corporate FDs to maximize returns and diversify their financial portfolio. The interest gained via corporate FDs gets added to the income of the investor. TDS gets deducted if the total interest gained per year is over INR 5,000.
- Bank savings accounts with high interest
A lot of banks now offer good rate of interest on savings accounts. Investors can earn around 6 to 7 percent as interest per annum via such savings accounts. The interest rate is however dependent on keeping a minimum balance. People can deposit money into a savings account as well as withdraw from it whenever they want. It thus does not come with any liquidity or tenure constraints. Interest of up to INR 1 lakh earned via investment in a savings bank account is exempt from taxation.
Investors can use the money earned as interest from savings account deposits to gather funds for their vacation. They may even invest in other higher interest earning instruments like FDs, RDs, sweep-in FDs, and/or mutual funds, so as to be able to get a bigger corpus for their vacation.
- Mutual funds with liquidity
Mutual funds (MF) with liquidity or liquid mutual funds are debt-based MF schemes. Investors can put in their surplus money into a well-researched and stable liquid mutual fund to earn good returns in the medium or short run, while ensuring that the risk remains low. One can easily withdraw their money from such MFs without fretting about being charged an exit load. The exit and entry route is simple and easy.
Unlike the above mentioned investment options, liquid mutual funds do not offer fixed returns. Its returns are based on the prevailing conditions in the market. Investors can expect to earn returns of about 6.5 to 8 percent p.a. on their liquid MF investments. Investors can put in their lump sum savings or business funds for the short term in liquid mutual funds and earn more than decent returns on such investments.
Liquid MFs are subject to gains in capital and capital gains get taxed. The tax is dependent on the tenure of investment in such funds. If an investor exits the fund within three years, then he/she will need to pay STCG or short term capital gains tax, while the LTCG or long term capital gains tax is levied on liquid MF investments that are held for more than 3 years.