Today, a large part of the salaries of many individuals goes towards paying off loans and bills. As a result, these individuals are unable to save and invest. Many people often overlook the timeless advice of the great investment Guru Warren Buffett: “Do not save what is left after spending; instead spend what is left after saving.” It is crucial to save a portion of your salary. It will stand in good stead for you.

Savings: Precursor to wealth creation

Even if you manage to save a small sum, say 5% of your salary, then it can be a fairly good number to begin with. Salary day savings need not be a financial goal on its own. You should save even if you may not have a financial plan. The money kept aside can be used to deal with a financial emergency, invest in a financial instrument or even to start a business.

One of the efficient ways to use your salary day savings is to invest in short-term investment avenues which have no lock-in periods and can be easily liquidated. In this context, liquid ultra-short duration and money market funds fit the bill.

How do they work?

Liquid funds invest in debt and money market instruments that mature in less than 91 days, whereas money market funds invest in money market instruments with residual maturity up to one year. Ultra-short duration funds invest in debt securities and money market instruments in such a way that the portfolio duration remains between 3 and 6 months. To put it simply, these schemes invest in short-term fixed-income instruments. A primary goal of fund managers of these schemes is to build a portfolio of fixed income instruments with minimal credit risk and high liquidity. Most portfolios of these schemes include good-quality papers, indicating low credit risk. Also, given the focus on short-term bonds, there is very low interest rate risk.

Risk-returns and all that

Investors should consider riskometer and potential risk class matrix (PRCM) to understand the risk levels. For most liquid, ultra-short duration funds and money market funds riskometer ascribes ‘low to moderate’ rating. Potential risk class matrix (PRCM) for liquid, money market and ultra-short duration schemes is B1. B1 stands for relatively low interest rate risk and moderate credit risk.

It must be noted here that Riskometer denotes the risk level of a debt scheme’s portfolio at a given moment of time and PRCM indicates the maximum risk a fund manager can take. PRCM is a fundamental attribute of a mutual fund scheme.

These are simple schemes to understand and they are suitable for even the most conservative investors. Investors can transact in them on the website of a mutual fund house, a transaction platform or through a mobile application. Liquid funds do have a small graded exit load structure for exits up to seven days from the day of allotment of units. In simple words, if you remain invested for more than seven days, you do not have to pay any exit load. These schemes have no exposure to stocks or commodities. They tend to earn returns commensurate with prevailing short-term bond yields. Historically, these have been more remunerative than the rate of interest offered by most savings bank account products in India.

Over three years ended 19 August 2024, liquid, ultra-short duration and money markets schemes on an average have given 5.78%, 5.57% and 5.84% returns respectively, as per Value Research.

Emergency fund: The first step

Investments in aforesaid debt funds can serve as an emergency corpus. Most financial planners recommend creating an emergency corpus equal to at least six months’ worth of living expenses of households. For instance, if your monthly household expenses are Rs 50,000, then you should have a minimum of Rs 3 lakh kept aside to tide over a financial emergency such as loss of a job. Since, these schemes do not ask for commitments such as signing up for a stipulated minimum investment per month or minimum investment duration, you can gradually build emergency corpus by tapping into them. You can start a systematic investment plan (SIP) by choice. Regular salary day savings in these schemes can help you build your emergency fund. Emergency fund and adequate health insurance lay the foundation of much-valued and much-desired thing: financial freedom.

Multipurpose Savings

Accumulated corpus in debt funds can be used not only to pay for future expenses but also to supplement your existing investments. Some investors use these to initiate systematic transfer plans (STP) into equity mutual fund schemes. Savvy investors switch their investments from debt funds into equity mutual fund schemes to take advantage of lower valuations of equities, in case of a flash crash. This strategy can effectively supplement already committed SIPs. Such lumpsum investments at lower levels can boost your portfolios’ returns.

Automate Salary Day Savings

If you are keen on initiating the wealth creation journey with salary day savings, then automate savings. Create a folio and enrol for an SIP on the day following the day of salary credit for a fixed sum.

For example, if your employer credits your bank account with Rs 50,000 towards payment of salary on 5th of each month, then opt for an SIP of Rs 5,000 on 6th of each month in an ultra-short duration fund. This approach ensures that you save in an unemotional manner. If you continue with this for three years, even without an increase in SIP amount, you will accumulate Rs 1.97 lakh assuming a 6% rate of return.

Use salary day savings to your advantage. It can be a strong start to the long journey to your financial freedom.