Short Term Investment Options
For a secured future, you should choose various kinds of investment options. There are products which can fulfill your short-term as well as long-term needs. Based on the risk perception, liquidity and returns, you can choose different kinds of financial products. If you are looking for good returns after a few months of investment, you can go for short-term options. The duration of most of the short-term investment options is less than one year. The risk perception of best short term investments will be almost nil and you can expect moderate returns.
Benefits of short-term investments
- Low risk
- Optimum returns on investment
- Quick turnaround time
Popular short-term investment options
The following popular short-term investment options can be considered to make the most of your investment:
The savings account of a bank or post office will deliver returns @ 3.5% per annum. You can keep funds in your savings account so that your emergency financial needs will be fulfilled in a very efficient manner. The interest earned on savings account up to Rs. 10,000 in a financial year is exempted from the income tax. The money can be withdrawn very easily by using the debit card from any ATM (Automated Teller Machine), cheque or cash withdrawal at the bank branch.
There are savings accounts offered by some private banks which offer interest of 6%. If you maintain a minimum balance of Rs. 10,000, you can get interest of 6% with Yes Bank or Kotak Mahindra Bank Savings account.
You can open a fixed deposit for a short-term. The tenure of the deposit can be less than one year. The interest earned on the fixed deposit will be higher than the savings account. You can also go for a longer tenure and the fixed deposit can be closed before the due date. The fixed deposit can be closed as soon as you need liquidity. The bank will impose nominal penalty and the principal amount and the interest will be credited into your account immediately. Fixed deposits are safe means of investment. There is no risk to your deposits held in a public or private bank.
Recurring deposits of post offices are very popular. You can open a recurring deposit in a bank as well. If you have access to the internet banking facility, a recurring deposit can be opened online. As soon as you need funds, the online RD can be closed. The principal and accumulated interest will be credited to your savings account immediately.
Debt funds are a safer option. The returns generated by the debt fund is less than the equity fund. However, there will be risk associated with equity funds. If you are interested in investing for few months (6 months to 18 months), you can choose short-term funds. Instead of investing in stocks directly, you can invest in mutual funds as the funds are managed by professionals. You can build a professionally managed portfolio by investing in mutual funds. You can choose SIP mode of investment also. However, SIP is ideal for long-term investment.
Treasury bills are also called as Treasury securities. They offer very high liquidity. Hence, you can consider them as best short term investments to fulfill your future financial needs. There is safety for the investment and the returns are higher the bank’s saving deposits. The duration of treasury bills varies from 91 days to 365 days.
Money market instruments
Money market funds or money market instruments are also called liquid funds. The greatest advantage of the fund is the security. The risk for these funds is the lowest among mutual funds and you can expect higher returns. The money market instruments come with a maturity period of 91 days.
There are liquid funds whose maturity period varies between 4 days and 91 days. Before investing in liquid funds, you should be aware of entry load as well as exit load. The return of liquid funds varies from 4% to 10% per annum. You can park some funds in liquid funds to fulfill your emergency needs. The returns of liquid funds are higher than ultra short-term funds.
Certificates of deposit
Certificate of deposits offered by various reputed financial institutions and NCD (Non-Convertible Debentures) are a great means of short-term investment options. You can earn interest on the capital ranging from 9% to 12% per annum.
Investment in gold or silver is ideal for short-term as well as long-term investment. The price of precious metals like silver and gold will increase every day. Hence, you can retain gold or silver in your portfolio to achieve better returns on a short-term basis. The sheen of gold will not fade and you can buy in various forms. Gold bonds offered by government of India through banks will help you earn interest on the gold as well. However, it will not offer the liquidity. On the other hand, you can buy physical gold in the form of god bar or gold coins. The gold bar or coin is available by many banks and financial institutions. You can buy pure gold and standard gold from reputed refineries or jeweler stores as well. By investing in exchange-traded gold funds, you can expect high liquidity.
Fixed Maturity Plans
FMP (Fixed Maturity Plans) are close-ended debt funds. No further subscription is allowed for close-ended fund. Investors should subscribe to the fund during the offer period and fixed returns are delivered to the investor after the maturity date. FMPs are highly tax-efficient and you can reap best returns. However, you will get returns after deducting the dividend distribution tax. You should avoid investment in income, dynamic, MIP and gilt funds as the investment horizon is long and the risk is high.
Fixed maturity plans are nothing but debt funds which invest your money in.
If you hold investment for more than one year, you can earn more than 8% interest after adjusting the tax. If you are looking for tax-efficient investment option, you can go for arbitrage funds. Before investing in arbitrage funds, you should go through the credit rating given CRISIL. There are arbitrage funds as well as arbitrage plus funds. If you go for pure arbitrage funds, the equity exposure will be hedged and the risk perception will be low. You should be aware of the exit load before investing in arbitrage funds.
Other investment options
In addition to the 10 short-term investment options listed above, you can also consider various other funds and investment options available to make the most of your money.
There are funds and investment options which can be held for less than 5 years as a short-term horizon.
- Large-cap mutual funds - There will be substantial growth by investing in large-cap mutual funds. The returns will be high on a short-term as well as long-term basis. You can expect quick and high returns in 1-3 year duration of the investment.
- ELSS - ELSS (Equity Linked Saving scheme) is a tax-saving mutual fund scheme. The minimum lock-in period is 3 years. There will be high earning potential by investing in equity-based savings scheme. You can get an exemption from tax in three ways. The principal amount invested every financial year up to Rs. 1.5 lakh is exempted from the tax. The Returns obtained on the fund will be reinvested and they are not taxable. The maturity amount is tax-free in the hands of customers up to Rs. 1 lakh per annum.
- You can choose either lump sum or SIP mode of investment to participate in ELSS. Each installment should complete at least 3 years locked-in period before getting eligibility for redemption.
- Post Office Time Deposits - Post Office time deposits are available with tenure of 1, 1, 3 and 5 years. The interest on the time deposits will be paid on annual basis. If you go for 1-year investment, the interest will be paid on monthly basis. However, the interest calculation will be done on a quarterly basis. The interest rate on time deposits will be set by the Government. It will be in between 6.6% and 7.5% for deposits of 1 to 5-year duration.
- Auto sweep account - You can open an auto-sweep account with your bank with online or offline activation. If the amount is savings account is greater than Rs. 10,000 fixed deposits will be created by the bank with tenure of 12 months. As soon as you need funds, the fixed deposits will be closed and credited into your savings account. It is possible to earn interest up to 9% per annum by opting for an auto-sweep account. Some of the popular banks offering the sweep-in and sweep-out facility include SBI, ICICI and Axis bank. However, the interests earned on fixed deposits are taxable.
- Senior citizens will be able to get income tax deduction up to Rs. 50,000 of interest earned on fixed deposits per annum. No TDS will be deducted by the bank if the interest earned in a financial year is less than Rs. 50,000.
- Ultra-short term funds - The risks associated with ultra-short-term funds are higher than liquid funds. The maturity of short-term debt securities will vary from 90 days to 1.5 years. You should figure out the maturity period and credit rating before investing in short-term funds. If the maturity period is long, you will lose the interest rate. If the credit rating is low, the risk will increase. The exit load of short-term funds will be in between 0.1% and 1%.
Short-term investment and duration
7 days to 1 year
6 months to 5 years
Money market instruments
1 day to 91 days or higher
Gold or silver
Short –term debt funds
1 month to 6 months
1 year to 3 years
How to choose short-term investment options?
To choose chose short-term investment options, the following criteria should be applied:
- Lower the risk
- Find out the maturity term
- Check the timing of goals
Risk reduction and simplification
You should take steps to reduce the level of risk in the short-term investment. If you choose high-risk assets, there will not be time to recover the loss. When you are investing for short-term, you should choose products which deliver stable returns. If you invest in equity-market related products, there will be great risk to the principal as well. Hence, you should focus on funds which invest in government bills and company deposits. The credit rating given by competent agencies will help you assess the risk factor. If you are a beginner, you should take the help of a financial expert so that you can make the most of your investment.
Tenure of investment
You can park your funds for one day to 1 year in various short-term funds after assessing the risk factors. The selection of investment should be done as per your convenience. If you have online access, the short-term funds can be subscribed online and they can be sold online instantly on any working day. Similar, the creation of fixed deposits and recurring deposits can be done online by having access to internet banking credential. You can choose the tenure and most of the short-term investment options offer flexibility to close the account before the maturity date.
Synchronization of goals and returns
You should take steps to synchronize your goals with the returns. You can choose investment options which can fulfill your emergency medical treatment or children’s education or repair/renovation of house due to contingency. The change in job or location will also impact your earnings and you might want to absorb the same with the savings made in various forms.
There are various kinds of short-term investment plans in India. You can choose various products as per the risk appetite, liquidity and returns. The online access to investments will give great convenience so that you can invest and withdraw the funds very easily.
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