Short-Term Investments – A Beginner's Guide

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At times, we need to part away with our money to let it grow more money for us. When we do it from a short term perspective, we call it making a short term investment. Short term investment refers to any type of investment that is supposed to be hatched for less than 3 years. In contrast to the long term investment, short term investment enables the investor to withdraw the money periodically for situational expenses. These investment plans suits best to the tastes of impatient investors or those who cannot afford to wait through 5-10 years to get the returns.

 A proactive investor maps out what he/she needs out of an investment by asking questions such as:

  • How much time do I have?
  • How much risk can I take?
  • How much liquidity do I need?
  • How much control do I want?

The Pros of Short Term Investment

1. Short Turnaround Time - The obvious advantage is that you get the money fast without having to wait for the whole investment tenure to end. With long-term investments, it takes at least 3 – 4 years before any substantial returns are earned, discouraging the investors especially the impatient one.

2. High Liquidity – The biggest merit of making a short term investment is the freedom of pulling your money out whenever you want. Such a high liquidity investment proves to be very beneficial when a financial contingency hits, and the investor cannot invest further. On the other hand, when the money is pulled out from long term investments before the fixed tenure, there are heavy costs to incur.

3. High Flexibility – For most of the short term investments, there's no lock in period. Even if there is, it is never too long to bear. Thus the investor is not obliged to continue with the investment if it's not doing too well for him. Rather, the investor can simply pull out the money and park it in some other investment avenue. But in the case of long term investments, there's no turning back once you invest. The money can't be pulled out without incurring exit charges and surrender charges. Let alone the returns, the investor ends up a major chunk of the principal amount as well. So, flexibility is one thing that gives an edge to short term investments.

4. Transparency - Most of the short term investment options are transparent so much so that you will be able to take a count of your return every day. Hence, short term investments are most apt for tactical investors who like to delve into the ins and outs of the market. On the other hand, in long term investment, the investment companies do not disclose as to where the funds have been deployed.

The Cons of Short Term Investment

1). High Risk – The real pebble in the shoe in short term investments is the high risk involved. The best way to understand this is that risk is indirectly related to the investment tenure. Shorter the tenure, higher the risk. Thus short term investment are cursed with thicker chances of yielding negative returns. In a 10 – 20 year span, no form of investment yields negative returns.

2). Low Returns – One should not expect to earn substantial profits in a short period. The money parked in a short term investment never bloom to its full potential. As per the conventional wisdom, wealth can only be maximized over a longer tenure of investment. Moreover, the returns made in a short term investment are usually subjected to taxes further lowering the profit margin.

3). Costlier – For an investor holding onto the investment for a short tenure involves heavy fees and charges. Simply put, there are costs to incur in case you are planning to enter, exit or re-enter the market at the blink of the eye.

4). Time Consuming - Unlike long term investing wherein the invested money is left by itself to grow in time; the money in short term investment is multiplied by proper timing and tactics. Experts and analysts spend great deal of time, effort and resources to predict the returns proactively and make some substantial profits.

Smart Short Term Investment Options

Nothing works like long-term investments to yield substantial returns. However, there are some short-term investment avenues where the investor can earn good returns in a short period of time. Here are some viable investment options:

1). Savings Account

The seemingly simple savings account is a great option to park your money. The obvious pros are safety and high liquidity. Savings account give you the freedom to pull out your money through checkwriting, ATM or bank withdrawal. The only catch to a savings account is that the banks need a specific minimum balance in the account. The cut throat competition among the banks is leading to a continuous uprise in the return rate offered. At present, the investor can earn up to 7.25% interest rate on a savings account. The average rate being offered is 4.0%.

2). Liquid Funds 

It is a variant of mutual fund in which the objective is to protect the capital rather than maximizing returns. Liquid funds are names so because of the high liquidity they come up with. The investor can issue cheques from a liquid fund. Moreover, there's no lock in period to bear. Liquid fund is the least risky variant of mutual funds. The investment is made in least volatile instruments such as treasury bills and government securities. In terms of returns, liquid funds are in midway between savings account and bank fixed deposits. Unlike the conventional mutual funds, liquid funds free the investor of having to ride the lows and highs of the market and yet enable him to gain an optimum yield out of the investments.

3). Bank Fixed Deposits (Bank FDs)

Bank Fixed Deposits are more or less like the savings account but with a higher return rate. However, unlike savings account, the money cannot be withdrawn before the investment tenure, without incurring the penalty charges. But then, the investment tenure is quite flexible offering the investor to invest for as short a period as 7 days up to 10 years. Yielding out a return of 10.5% on an average, Bank FDs work well for conventional Indian investors with a low risk appetite.