Short-term investments are financial instruments that are held for a short period of time, basically less than one year & are convertible into cash. These investments are best suited for those individuals who want to receive returns along with capital preservation & liquidity maintenance. They attract low-risk & lower returns than long-term investments. Examples of short-term investments are bank fixed deposits, saving accounts, recurring deposits, etc.
Things to be considered while investing in a Short-Term Investment Plan
Provided are the things that are to be considered while investing in a Short-Term Investment:
- Investment Objective
An individual, when considering short-term investments, should define the investment objectives & the time period within which you will be requiring funds back.
- Risk Tolerance
As we know, short-term investments attract lesser risk, but one should choose the plan that best suits one’s risk appetite & comfort level.
- Liquidity Needs
One should invest in a plan that will provide liquidity, i.e. you can withdraw the funds without thinking about the delays or penalties.
- Interest Rates
Also, before investing, one should make a proper comparison of the different options available to get the maximum returns.
- Tax Implications
Take into account the tax implications of short-term investments, i.e. short-term capital gains may attract higher taxesthan long-term capital gains.
- Inflation
One should also consider the inflation factor while calculating return on investments, mainly when you are opting for low-risk options.
- Fees & Charges
Have a proper understanding of the fees & charges associated with the investment plan chosen.
Features of Best Short-Term Investment Options
Let us discuss the features ofdifferent Saving Schemes available for a short period of time, i.e., 1 month, 3 months, or 6 months.
Best Short-Term Investment Options for 1 Month
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Liquid Funds
- One can withdraw funds as fast as 1 business day.
- They attract lower risk levels& higher returns.
- They are flexible plans that allow you to invest in SIP or lumpsum.
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Savings Account
- These investments are highly liquid & easily accessible, where you can deposit & withdraw your funds easily.
- As your amount is secure up to a certain level, there is a lesser risk of losing the principal amount.
- One can easily access the funds in case of any future expensesor unexpected requirements.
- They offer lower interest rates.
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Equity Mutual Funds
- Get higher returns over a longer tenure, especially when the market is performing well.
- One can diversify the investment portfolio to reduce the risk.
- Get professional advice from experienced fund managers when choosing a plan.
- LTCGs are taxable at lower rates thanSTCGs.
B. Best Short-Term Investment Options for 3 Months
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Bank Fixed Deposit
- The lump sum amount is to be deposited for a fixed tenure, with fixed interest rates & guaranteed returns.
- The tenure ranges between 7 days to 10 years.
- Highly liquid & safe.
- The present rate of interest ranges between 2% & 9%.
- Tax is charged up to 30%.
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Recurring Deposits
- It can range between 6 months to 10 years.
- They come with a minimum lock-in period of 1 month.
- Only the principal amount would be paid back in case of premature withdrawal of funds within 1 month.
- The interest rate ranges between 3.25% & 7.50% per annum for 1 year of RD.
- Interest received on RD is added to the income for taxation purposes.
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Money Market Account
- There is no lock-in period.
- These are highly liquid investments with low risk.
- Returns are not fixed, & the present rate is 3.35% p.a.
- Profits in case of investments help for above 3 years are taxed at 20%.
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Treasuries
- Highly liquid & safe.
- The maturity period ranges between 91 days to 365 days.
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Debt Mutual Funds
- One can diversify the investment portfolio to reduce the risk.
- Get professional advice to choose the plans.
- Examples are corporate bonds, government bonds, & money market instruments.
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Derivatives
They are suitable for individuals with good knowledge &high-risk tolerance.
C. Best Short-Term Investment Options for 6 Months
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Post Office Time Deposits
- It can range from 1 year, 2 years, 3 years, & 5 years.
- This plan does not allow withdrawal of funds before 6 months.
- The interest amount is on an annual basis.
- Interest received on deposits is added to the income for taxation purposes.
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Gold or Silver
- These are meant for both short & long terms, providing higher returns.
- These are secure & risk-free plans.
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Arbitrage Funds
- One can earn profits with the help of price discrepancies amongst the same security being traded in different markets.
- These plans offer consistent returns& are best suited for those who want a regular source of income.
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Fixed Maturity Plans
- Under this plan, one can pay debts with a certain maturity date.
- These plans offer a fixed rate of return.
- These plans come with fixed returns & fixed tenure, & you cannot buy or sell them once the initial offer period is over.
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Debt Instruments
- These plans are best suited for those individuals who are reluctant to take risks.
- These instruments provide stability along with good returns.
- These funds are highly liquid, have a maturity period of up to 91 days, &have 7-9% interest rates.
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Company Deposits
- Choose non-convertible debentures to secure the capital with an attractive rate of interest ranging between 9% to 12%.
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Short Term Funds
- These funds attract lower risks & consistent returns.
- These are liquid funds that can be bought & sold on a single day.
- The returns are limited in comparison to long-term debt funds.
Conclusion
Short-term investment plans are best suited when you are looking for flexible investments with low risk but good returns. One can consider investing in gold, which is highly liquid & can be converted into cash. Also, always diversify your funds across different plans rather than investing in one single asset. This will help in reducing the risk of capital deterioration.