Benefits of Investing in Short Term Investment Plans

They say – investment is for the future, which is true. We all invest in securing our future financial requirements. Requirements such as higher education of our children, purchasing a dream home, or securing after retirement life are some of these examples. For fulfilling such future needs you can either go for short-term investments or long-term investments.

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Both these investment plans have their benefits, and today we are going to discuss the benefits of investing in short-term investment plans.

What is Short-Term Investment?

A short-term investment strategy can mean any investment that can have a tenure of several months to several years. The investors use a basic thumb rule of three years and anything that is invested under this period is considered as a short-term investment plan. The short-term investments either have high risks or low yields that depends on where you keep your money. However, they are considered as important for making profits from your liquid assets and cash savings.

So, whether you want to save money for purchasing your next car in one year or accruing the amount for the down payment of your home in the next two years or putting money for six months to get a franchise of a food chain are all come under short-term investment plans. In this way, a short-term investment plan is all about making a maximum of your money in a small amount of time with minimum penalties and risk. The best short-term investment plans can easily be turned into cash or can easily be rolled-over to other long-term or short-term investment schemes.

Within the portfolio of your investment, it is seen that the short-term investments protect long-term investments. Real estates and stocks have a high yield, especially when you put them invested for a longer period. The problem comes when some emergency arrives and you need cash instantly. In such situations, you do not have a buffer to wait and you have to liquidate your long-term investment even at a loss.

The solution to deal with this problem is to keep your money in short-term investment plans that can easily be liquidated in situations of emergency. Even though cash is the best solution for emergencies but it offers no interest. Keeping your money in a savings account is also a solution but the interest that it offers is low. On the other hand, short-term investment plans provide a way to increase your profit over the assets that you want to keep more liquid as a solution against future financial problems.

All you need to do is to plan your investment as per the important events of your life. Most of the time, different events occur at different ages and hence the investment must be planned in a way majority of them are covered. Therefore, in your financial planning, you need to figure out what are your financial requirements, and when you want the money for them. You must ask the following questions to yourself while making an investment plan:

  • What are my goals related to finance?
  • What is the amount that I need to invest in?
  • How much I wait until I require money?
  • What is my flexibility in this time frame?
  • Would I be able to lose any of my investments?

The main drawbacks of short-term investments are low yield and high risk. If you invest in the short-term in the stock market, then you probably are opting for high risk with your money that is invested in stocks. This is because of the cyclic nature of the majority of stocks. Another issue is the tax consequences for the investments that are made for less than a year.

Since you never want to lose your hard-earned money, thus the best option to do so is to invest in safer investment plans such as short-term investments. Some of the best short-term investments and their rate of interest are given below:

Short-Term Investment Option

Rate of Interest (%)

Money market accounts

5 – 9%

Recurring deposits

6 – 7%

Debt instruments

7 – 11%

Post-Office time deposits

5.5%

Fixed Deposits of the bank

5 – 8%

Corporate deposits

7 – 8%

Mutual funds of large-cap

8 – 13%


Final Words:
These are some of the best options to save your money in short-term investment plans. However, a disadvantage with Fixed Deposits is that you are penalized for making partial or untimely withdrawals (withdrawing before the maturity of the investment). Most of the investment professionals suggest investing in money market funds when you want to short-term investments. The yield of money market funds can be lower than the Fixed Deposits but the best part is you can withdraw your money from them whenever you want without giving any penalty. This advantage makes the money market funds as the best way to protect your financial future as your money is always ready in cash and you can easily use it in case of emergency.

Written By: PolicyBazaar - Updated: 02 July 2021

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