Surplus cash is the amount that left in our bank accounts after all our monthly expenses. An individual can either keep this amount in saving bank account to enjoy tax free interest and liquidity or can invest some part of the surplus money to generate better returns. But before investing surplus money one has to Calculate Cash Needs In Near Future to decide how much cash he can invest and for how long.
So here we will take this discussion further with an example:- Mr Rohit earns Rs 30,000 per month and after all his monthly expenses he manage to save Rs 10,000. As Rohit keep all his savings in his saving bank account his current account balance is Rs 1 lakh. Now he want to invest a part of his surplus money into some investment scheme so that he can earn some extra post tax return over saving bank account interest rate of 4% p.a. So lets look his future cash needs to decide how much surplus he can invest.
- Rs 20,000 for an insurance policy premium payment.
- Rs 10,000 for children college fee
- Rs 5000 for travel to home town
So after analyzing his upcoming expenses of Rs 35,000 it becomes easier for Mr. Rohit to decide what is the balance amount that he can invest in some other investment plans.But here comes an another factor that he needs to think on before investing i.e Set Investment Goal. Investment goal is the amount of cash he needs after a set period of time. It is very important for an investor to have a clear, defined and a realistic goal before investing.
In the above example, like Mr. Rohit want to invest his surplus money of Rs. 65000 and Rs 10,000 every month with a goal to buy a second hand car after three years. So to have a set amount after a set period of time he has to invest his money in only those investment plans whose locking period is 3 years or less.
So lets have a look what are the different investment avenues available to an investor with less risk exposure:-
Fixed/ Term Deposit :- By depositing your surplus cash in fixed deposit, investor can fetch an average rate of interest of 10% which will attract TDS only if the interest income exceeds Rs. 10,000. It is a safe and well known investment avenue where investor lend money to bank for a fixed period of time and get higher rate of interest on his investment.
Recurring Deposit Account :- Another way of investing your money to earn higher returns is recurring deposit. Recurring deposit is a deposit account which allows account holder to deposit a fixed sum of money every month for a set period of time and get higher return of the same. It is a enhanced version of fixed deposit where you can deposit your surplus money every month and get rate of interest little less than fixed deposit.
Company Fixed Deposit : – This is an another form of fixed deposit scheme where investor lend money to company for a set period of time and get interest of investment. The interest rates on company fixed deposits are usually higher than bank fixed deposits. But there is a minimum investment amount criteria which make this investment avenue out from the reach of some small investors.
Fixed Maturity Plans : – Investor can also invest there surplus funds into fixed maturity plans issued by mutual funds. In this type of investment plan investor lend money to mutual fund companies which further invest these funds into debt instruments. The rate of interest on FMP’s are not guaranteed like fixed deposits but it usually offers higher post tax return than fixed deposit schemes.
Gold/ Silver :- Another investment avenue for investors is investment in Gold or silver. In recent years we have seen a drastic jump in gold and silver prices which make people think about this investment avenue too. Investors can either purchase gold jewellery or can invest electronically through gold ETF’s or gold saving funds.
Mutual Funds :- Mutual fund SIP/ VIP is another way to invest a fixed amount of money to get higher return on investment. Mutual fund investments are riskier than fixed deposit or FMP investments as under this type of investment mutual fund companies invest under stock market equities to generate higher returns for investors. As there is guarantee returns and investors can loose his investment so only those investors who can afford to loose money should invest there surplus funds under mutual funds.
Money Market/ Liquid Funds :- Liquid mutual funds is an another investment avenue which offers good returns, safety and liquidity to investors. This type of investment offers interest rates higher than saving bank account but less than FD or other saving schemes. It is one of the safest form of mutual fund where investor can invest to enjoy all the flexibility of saving bank account with higher interest rate.