If you want to put up your money and get it back in a few years, you should consider short-term investments. Short-term investments are investment vehicles that can be quickly converted to cash within a period ranging from one day to five years.
Short-term investments can help you achieve your financial goals, like planning your next vacation or wedding or maybe building your emergency fund, more quickly and easily than keeping your money idle in a bank account. So, to assist you in making an informed decision, we have covered every detail of short-term investments in this article.
What are short-term investments?
We all make investments to achieve our financial goals, whether they are short-term investment plans, such as planning a vacation, or long-term plans, such as purchasing your dream home. Nothing beats long-term investment returns, but what if you can’t afford a long gestation period? The answer is straightforward and succinct: “Short-term investments.”
Simply put, short-term investments, also known as temporary investment securities, are financial instruments that are highly liquid and can be sold or converted into cash in a matter of days to five years.
How short-term investments work?
When a company, individual, or institution makes short-term investment plans, they have two specific goals in mind: capital preservation and high liquidity. Capital appreciation is like a layer of ice cream on top of a vanilla drink. It improves the flavor of the drink.
In the case of companies that enjoy a high cash position have the privilege to invest in stocks, Bonds, or Cash equivalents like CDs, Treasury Bills, Corporate Commercial Papers, or other low-risk instruments. These marketable securities, though highly volatile, are comparatively safer investment bets and outdo normal savings bank returns.
Moreover, you can put your savings or extra cash to good use by choosing short-term investment plans that provide rewarding returns while protecting your principal.
List of 7 best short-term investment options in India
Short-term investments are most suitable for investors who have a low-risk appetite and want to achieve their financial goals quickly. Investment planning becomes crucial in identifying the right avenues for these short-term goals.
Here, we have gathered some of the best short-term investments in India under one roof, saving you a lot of time on research.
- Savings account
A savings account is more than just a place to store your money. It is a smart way to earn interest, build financial security, and access a range of banking services. With a savings account, you can deposit and withdraw money at your convenience while also enjoying the safety of keeping your funds in a regulated institution.
Depending on the type of savings account you choose, you may also get additional benefits such as ATM cards, online banking, mobile alerts, and more. A savings account is an ideal option for anyone who wants to save for short-term investment goals or simply has some emergency funds at hand.
- Liquid funds
Liquid funds are a type of debt mutual fund that puts its money in short-term money market instruments that offer fixed income. These instruments include treasury bills, commercial paper, certificates of deposit, and others. With a maturity period of up to 91 days, liquid funds are one of the most popular short-term investment options in India. They are highly liquid and low-risk.
These financial instruments work well for investors who want to preserve their excess cash for a short period while earning higher returns than a savings account. Liquid funds also provide simple redemption, usually within one business day, and no exit load after six days of investment. SEBI regulates these short-term investments, which must adhere to strict guidelines to ensure the safety and quality of their portfolio.
- Recurring deposits/Fixed Deposits
Recurring deposits are a type of term deposit where you invest a fixed amount of money every month at a predetermined interest rate. Recurring deposits are one of the most popular short-term investments in India, as the interest rate fixed at the time of opening the account does not change during the deposit period.
Recurring deposits are suitable for investors who want to save for short-term or medium-term goals or who want to create an emergency fund. These short-term investments also have some tax implications, as the interest earned is added to the income of the depositor and taxed as per their applicable slab rate. If you want to make a single-installment payment, you can also opt for Fixed Deposits.
- National Savings Certificate (NSC)
National Savings Certificate is a traditional investment scheme that offers guaranteed returns added with tax benefits. NSC is a short-term investment that has a tenure of five years, and the interest rate is fixed at the time of investment. The current interest rate for NSC is 7.7% per annum, compounded annually.
NSC is an excellent choice for risk-averse investors or those looking to design short-term investment plans. NSC also enables investors to claim deductions up to Rs. 1.5 lakh. The interest on NSC is taxable at the investor’s slab rate, but it is also deductible under Section 80C. NSC can also be used as collateral for a loan.
- Fixed Maturity Plans(FMPs)
Fixed Maturity Plans (FMPs) are a type of mutual fund scheme that invests in debt or money market instruments that have a fixed maturity date. FMPs are close-ended schemes, which means they have a fixed tenure and are open for subscription only for a limited period. FMPs are one of the best short-term investments in India, suitable for investors who want to earn a predictable rate of return and avoid the interest rate risk of debt markets.
FMPs are low-risk, short-term investments, but they are not risk-free. They carry credit risk, which is the risk of default or downgrade of the issuer of the debt instrument. They also have liquidity risk, which is the risk of not being able to sell the units before maturity. FMPs are ideal for investors who have a fixed investment horizon and can stay invested till maturity.
- Equity-linked savings schemes
Equity Linked Savings Scheme (ELSS) is a type of mutual fund scheme that invests mainly in equity and equity-related instruments. This short-term investment is a tax-saving scheme that allows investors to claim a deduction of up to Rs. 1.5 lacs. ELSS has a lock-in period of three years, which means investors cannot withdraw or redeem their units before the completion of this period. ELSS is suitable for investors who have a high-risk appetite and a short to medium investment horizon.
Advantages and disadvantages of short-term investments
Though short-term investments are regarded as a useful tool for dealing with unanticipated financial emergencies or obligations that may arise in the future, however, these perks also have some pitfalls.
|Short-term investments offer liquidity and flexibility, as they can be easily accessed or sold when needed.||Offer lower returns than long-term investments, as they have lower risk and lower potential for capital appreciation.|
|Short-term investments help diversify the income sources and reduce the overall portfolio risk, as they are less affected by market volatility and interest rate fluctuations.||Incur higher costs due to frequent transactions and brokerage fees. They may also be subject to taxes and inflation, which can erode the real value of the returns.|
|Short-term investments can help achieve short-term or medium-term financial goals, such as saving for a vacation, a car, or an emergency fund.||They are not suitable for long-term financial goals, such as retirement, education, or wealth creation, as they may not provide enough growth or income over time.|
short-term investments vs. long-term investments
Depending on the time horizon and the risk appetite of the investor, there are different types of investments, such as short-term and long-term investments.
Short-term investing works best for investors with short-to-medium-term investing horizons ranging from one to five years, whereas long-term investing has financial goals ranging from five years to twenty years or more.
- Short-term investments offer high liquidity and flexibility, whereas long-term investments target stability and growth.
- Short-term investments typically offer lower returns than long-term investments, as they have lower risk and lower potential for capital appreciation.
- Short-term investments may incur higher costs than long-term investments due to frequent transactions and brokerage fees. They may also be subject to taxes and inflation, which can erode the real value of the returns. While with long-term investments, you enjoy tax benefits such as indexation and capital gains tax.
Examples of short-term investments
Some common examples of short-term investments include-
- Certificate of Deposits (CDs)
Certificates of Deposits (CDs) are a type of savings product that allows you to earn a higher interest rate than a regular savings account by locking in your money for a fixed period. However, if you withdraw your money before the maturity date, you may have to pay a penalty fee or lose some interest.
- Treasury Bills (T-bills)
Treasury bills are short-term loans to the Government of India, managed by the RBI. They have different maturity periods and are sold at a lower price than their value. They help the government fund its expenses and regulate the money supply. They are safe and easy to sell investments.
- Money Market instruments
Money market securities in India are short-term financial instruments that are traded in the money market. They include treasury bills, commercial papers, call money, commercial bills, and certificates of deposit. They are regulated by the Reserve Bank of India and are considered low-risk and liquid investments.
- Peer to Peer Lending (P2P)
Peer-to-peer lending is a form of online lending that connects borrowers and lenders directly without involving a bank or a financial institution. It can be a short-term investment option for lenders who want to earn higher returns than traditional savings products and for borrowers who want to access credit at lower rates than banks. However, peer-to-peer lending also involves higher risks, such as default, fraud, and platform failure. Therefore, investors should do their due diligence and diversify their portfolios across different platforms, borrowers, and loan types.
real-world examples of short-term investments
Now, let’s consider you own a company, and your client paid you a bonus of Rs. 10 lakhs for completing a project successfully. You want to use this money to upgrade your office equipment after three months. Instead of keeping this money in your current account at zero interest, you can invest it in a three-month CD that offers an interest rate of 6.5% per annum. You will earn Rs. 16,250 as interest and get back Rs. 10.16 lakh at the end of the tenure, which you can use for our office improvement plan.
If you want to invest your money for less than five years and achieve a specific financial goal, you can opt for a short-term investment. These are investments that have a short maturity period and offer low risk and moderate returns.
We have discussed in detail some common types of short-term investments, like CDs, money market funds, treasury bills, and liquid mutual funds. You can enjoy the advantages of liquidity, safety, and flexibility with these investments, but you should also be aware of the challenges, such as low returns, inflation risk, and tax implications.
Hope you found this article insightful.
Frequently asked questions:
What is good to invest in the short term?
Depends on your risk, return, and liquidity needs. Some good options are CDs, money market funds, treasury bills, and liquid mutual funds. They are safe, flexible, and easy to access, but they offer low returns and may not beat inflation. Choose wisely and invest smartly!
Can I invest for one month?
Yes, you can invest for one month. Some options are CDs, money market funds, and liquid mutual funds. They can earn interest and preserve capital, but they may not offer high returns or beat inflation.
Where Can I Invest for 6 Months?
For a 6-month goal and some spare cash, you can invest in short-term options like CDs, money market funds, treasury bills, and ultra-short-term mutual funds. They offer safety, liquidity, and moderate returns but may not be very tax-efficient or inflation-proof.
Is short-term investment a current asset?
Yes, short-term investment is current assets. A current asset is an asset that can be turned into cash in one year or less, and a short-term investment has a maturity period of less than one year.