Half the advice on this site, and on every other, says the same thing: money you may need within about three years does not belong in equity. Far less is written about where it should actually go.
This is that article: where to park short-term money, ranked by how soon you might need it. The organising idea is simple — for this money you are buying certainty about the amount and the date, and every rupee of extra return you chase costs you some of that certainty.
Rank by how fast you can reach it
Short-term money is not one bucket. It splits by how quickly you might need it, and the right home changes with that.
Needed today or tomorrow, at any hour. A savings account. It pays the least of anything here and it is the only option that works at two in the morning without anybody's cooperation. Roughly a month of expenses belongs here for most households.
Needed within days. A sweep-in or flexi fixed deposit attached to your bank account is the most practical arrangement for the bulk of a cushion. The money earns deposit rates while it sits, breaks automatically when the balance runs short, and requires no decision from you at the moment you are least able to make one. Liquid and overnight funds serve the same purpose for people already comfortable with funds, with redemption that is quick though not always instant.
Needed on a known date, months away. A fixed deposit maturing shortly before the date. You give up access in exchange for a known amount on a known day, which is exactly the trade you want when the date is fixed — a wedding, a fee instalment, a property payment.
A simple structure that covers most situations: a month of expenses in savings, the rest of the cushion in a sweep deposit, and dated money in deposits timed to mature just before each date.
The options people reach for, and what each one costs
Fixed deposits. Predictable, familiar, and taxed as interest at your slab, which makes them expensive for somebody in a high bracket. Breaking one early usually costs a penalty on the rate. A ladder — several deposits maturing at intervals rather than one large one — gives access at regular points without breaking anything.
Liquid, overnight and ultra-short debt funds. Designed for exactly this horizon, with very short-dated holdings. They fluctuate slightly rather than being guaranteed, which is usually immaterial over months. Their taxation has been changed in recent years, so check the current treatment before assuming any advantage over a deposit.
Government securities and treasury bills, which individuals can now buy directly through the platform the central bank operates for retail investors. Sovereign, available at short maturities, and appropriate for somebody who will hold to maturity rather than trade them.
Corporate fixed deposits and bonds. A higher rate, and the reason for the higher rate is credit risk — the possibility that the issuer does not pay. For a cushion, this is the wrong trade: you would be accepting the one risk you cannot absorb in order to earn slightly more on money you must be able to rely on.
Where it does not belong, whatever the return looks like: equity or equity funds, anything with a lock-in, insurance-linked products, gold, and any arrangement offering an assured monthly return from an entity nobody has verified. Every one of them fails the same test — you cannot be certain of getting the amount on the day you need it.
The three mistakes that cost the most
Chasing an extra percent on the cushion. The difference between a good and a mediocre parking place on a year of expenses is small in rupees. The difference between having the money available and not having it is the entire reason the cushion exists. This is the one pot where the return genuinely does not matter.
Leaving everything in the current account instead. The opposite error and just as common, especially among business owners. Large balances sit earning nothing for years because moving them requires a decision. A sweep deposit solves this once and needs no attention afterwards.
Forgetting that inflation still applies. Over one or two years, losing a little purchasing power is the price of certainty and is fine. Over ten years it is not — and money that has sat in a cushion for a decade without ever being needed is probably not cushion money at all. Review the size once a year and move the excess to where it belongs.
Two practical notes. Interest on deposits is taxed at your slab and tax may be deducted at source above thresholds, so the post-tax return is lower than the headline — check the current rules. And for anything intended to be reached quickly, confirm how the money actually returns to your bank account and how long that takes, before you need it rather than during.
An account for the part that can wait
Keep the cushion at the bank and invest only what has a long horizon. Free to open
We do not distribute deposits, bonds or funds and earn nothing from any of them. Interest rates, taxation of deposits and debt funds, deduction at source thresholds and the facilities available to retail investors are set by banks, law and the regulator, and have been revised more than once — verify the current position before deciding. This is educational material, not advice. We run no tips group and no signal service, we manage nobody's money, and no return is promised.
Disclosure: the account-opening link on this page is under Atul Shrivastava's Zerodha Authorised Person registration (NSE AP Reg: AP2516003481; Zerodha Broking Ltd. SEBI Reg: INZ000031633) and earns a revenue share. TheFinBaba is not a SEBI-registered Investment Adviser — this content is educational, not investment advice.
A worked example of the split
Take a household with monthly outgoings of one lakh, an emergency cushion of six lakh, and a school fee instalment of two lakh due in eight months. Seventeen lakh is sitting in the current account because nobody got around to deciding.
One lakh stays in savings. Immediate access, no decision required, available at any hour.
Five lakh goes into a sweep-in deposit attached to the same account. It earns deposit rates and breaks automatically if the savings balance falls short, which means the cushion works without anybody managing it.
Two lakh goes into a fixed deposit maturing in seven months, comfortably before the fee date rather than on it. Dated money, dated instrument.
Nine lakh is the question worth asking. If it has no purpose and no date, it is not short-term money at all — it is long-term money sitting in the wrong place, and it should be allocated according to when it is actually needed. That is a different article and a different decision.
The point of the exercise is not the specific amounts. It is that every rupee should be able to answer when it might be needed, and the answer decides where it sits. Money with no answer is the money that quietly loses to inflation for a decade.
Frequently Asked Questions
Where should I keep money I need within a year?
About a month of expenses in a savings account for immediate access, the bulk in a sweep-in deposit that breaks automatically when needed, and anything with a known date in a fixed deposit maturing shortly before that date.
Are liquid funds better than fixed deposits?
They serve the same horizon and suit people already comfortable with funds. They fluctuate slightly rather than being guaranteed, and their taxation has changed in recent years, so check the current treatment rather than assuming an advantage.
Should I use a corporate deposit for a higher rate?
Not for a cushion. The higher rate compensates for credit risk, which is precisely the risk you cannot absorb on money you must be able to rely on. The extra return is small and the failure mode is not.
Can I buy government securities directly?
Individuals can buy government securities and treasury bills directly through the retail platform operated by the central bank. They suit somebody holding to maturity, and short maturities are available for this kind of money.
Is it bad to keep too much in short-term parking?
Over a year or two, losing a little purchasing power is the price of certainty. Over ten years it is a real cost, and money that has never been needed in a decade is probably long-term money sitting in the wrong place.
Related Reading
- Sizing a cushion for variable income
- How much the cushion should be
- What certainty costs over a decade
- Where the long-horizon money goes
- The beginners course, for Surat
- How the taxable side is treated
Disclaimer: TheFinBaba provides educational content only - this is not investment advice. Trading involves risk of loss.
