RBI keeps repo rate unchanged: 5 things fixed deposit investors can do to get better returns

When the investment horizon is so short, the focus should be on capital protection and liquidity and not on returns. If you hold a large amount of cash and need to redeploy it in 3-6 months, park it in a fixed deposit or liquid fund. Even if the return is marginally higher, it will not make a big difference in 3-6 months.

In fact, some banks are offering up to 6-6.5% interest on the savings bank account balance if the amount exceeds a certain threshold. If your bank is among these, then you can consider keeping the money in your bank account. Under Sec 80TTA, up to Rs 10,000 interest on the savings bank balance is tax free which will bring down the overall tax on your interest earned.

Liquid funds and ultra short duration debt funds. Government bond yields have risen in recent months and the trend may continue if inflation rises. But these funds will remain unaffected because they hold very short term instruments. For those focused too much on reducing tax outgo, arbitrage funds can be a good option. The category has given 4.18% returns in the past one year, which is comparable with the returns generated by debt fund categories. But these arbitrage funds get the same tax treatment as as equity mutual funds which means that short-term gains will be taxed at 15%.

Also read: 4 ways FD investors can enhance returns

The investment options are pretty similar in this case. You can also consider corporate fixed deposits, where interest rates are slightly higher than what banks offer. Note, however, that corporate deposits are not as safe as bank deposits. You need to exercise caution when investing in either.

Short-term debt funds are also a good idea. The benchmark 10-year government bond yield, which hovered around 6% for most of this year, has already moved up to 6.34% and is expected to rise further. However, funds holding short-term bonds will not be impacted. Arbitrage funds can prove very useful if the holding period is a year or more. Since these schemes are treated as equity funds by the taxman, gains of up to Rs 1 lakh will be tax-exempt.

Your have a wider array of options if you want to invest for three years or more. In this case, gains from debt funds are treated as long-term capital gains, meaning at 20% after indexation.

For five years, you can also consider Post Office schemes such as National Savings Certificates, Kisan Vikas Patras and the Monthly Income Scheme. These small savings schemes offer higher interest than bank deposits while the sovereign guarantee makes them completely safe. The problem is they are not very flexible. NSCs cannot be foreclosed, though Kisan Vikas Patras can be sold after 30 months. Senior citizens (above 60 years) can consider the Senior Citizens’ Saving Scheme, which offers 7.4% returns and pays interest quarterly.

Also read: Know PPF, NSC and other post office deposit schemes rates

Till last year, the Employees’ Provident Fund (EPF) was the best long-term investment in debt. Employees covered by the scheme could put away a big chunk of their pay to earn 8.5% tax free returns. But now, the interest earned on an employee’s contribution above Rs 2.5 lakh has become taxable. Even so, experts say that the PF remains the best long-term option and one should exhaust the Rs 2.5 lakh limit for tax-free contributions.

The Public Provident Fund (PPF) is another tax-free option worth considering. At 7.1%, it is far better than other small savings schemes and bank deposits. But it has an annual investment limit of Rs 1.5 lakh. If you have already exhausted this limit, you can consider the RBI Floating Rate Savings Bonds which are offering 7.15% right now. These bonds have a maturity of seven years and the interest rate is 35 basis points above the rate offered on the National Savings Certificates. If you want to save for your daughter, go for the Sukanya scheme which offers 7.6% tax free interest. But it is open only to girls below 10.