Short-term investments are highly liquid investments that can be converted into cash easily and without losing the invested value. People generally find it appealing to save their money in short-term investment instruments to fulfil their short term financial goals or as one of the financial cushions that can be used to absorb the financial shock in case of contingencies.
Let us understand about short term investment plans in detail.
Short-term investments are defined as financial instruments that can be converted to cash generally within five years. These are usually highly liquid investments with a maturity period of less than five years and have a premature withdrawal facility. These investment plans are quite useful when you need to secure your wealth over a short period or for an unknown period.
You can use such financial instruments for parking your emergency funds. Pensioners also use short-term investments to park the annuity funds, if the annuity pay-out is annual.
Short-term investment plans is a way to put your money into money market securities like treasury bills, corporate bonds close to maturity, and other financial instruments. The objective of such investments is to earn interest on additional money while maintaining liquidity.
These plans may offer:
Such investment plans also help banks, companies and even the government to maintain liquidity. At the same time, investors can earn interest on the money otherwise lying idle.
Here are a few distinctive features of short-term investments:
The only limitation these plans may have is that if you have a life cover of up to 20 times of your annual income. Insurers generally offer maximum life cover up to 20 times of annual income.
You want to have the best possible combination of safety, liquidity and tax with any investment. Without exception the best short-term investments may offer:
The best short-term investment is one, which can keep your invested capital safe. For example, savings accounts, liquid funds, T-bills, etc.
Capital safety is important as you may park the funds for an unknown period. You often want to either invest these funds in a better investment or use them for specific goals. Thus, losing capital by investing is never a good option.
Liquidity is the ability to turn the investment back into cash. If the investment locks in your money for a specific period, it defeats the purpose of short-term investment.
Taxes eat into your returns from the investment. Also, earning huge interest or capital gain is often not the purpose of short-term investment. However, it is better if you can save on taxes. Here are two types of short-term investment taxation which you can face:
When your short-term investment pays regular interest, the interest is taxable as part of your income. However, you can claim a rebate of up to Rs 10,000 under section 80TTA.
If you are withdrawing from debt funds like liquid and ultra-short-term debt funds, or zero-coupon bonds like T-bills, you incur a capital gain.
If you withdraw within 36 months of investment, you incur short-term capital gain (STCG). The earnings will increase your taxable income. If your withdrawal is after 36 months of holding, the gains are long-term capital gains (LTCG). LTCG gets the benefit of indexation before tax. So, LTCG is better than STCG.
The tenure of investment for short-term financial plans may range from 5-10 years and that is the reason they are typically used for fulfilling short-term life goals. In the terms of investment, any security that you can trade for cash within 12 months is a short-term investment option.
For example, you would ideally target the age of 25 for your daughter’s marriage. But, in case she wants to wait till 30, you still have five years to park the accumulated money. So, the tenure of the investment plans may vary from person to person and goals to goals.
|Investment||Rate of Return||Holding Period|
|Savings Account||2% to 7% p.a.||Nil|
|Treasury Securities||7.5% p.a.||91 days to 364 days|
|Fixed Deposit||2.5% to 8% p.a.||7 days to 10 years|
|Recurring Deposits||4% to 8% p.a.||6 months to 10 years|
|Liquid Mutual Funds||2% to 6% p.a.||1 day to No limit|
|Debt Mutual Funds||6% - 9% p.a.||36 months to No limit|
|Corporate Deposits (CD)||6% - 12% p.a.||1 to 3 years|
|National Savings Certificate (NSC)||6.8% p.a.||5 years|
|Equity Mutual Funds||7% - 15% p.a.||12 months to No limit|
|Stocks, Commodities & Derivatives Market||Variable||Less than a day to no limit|
Savings accounts are the most common and versatile short-term investment options. Debit cards linked with savings accounts are perhaps the best feature of savings account investments. However, if you are parking funds to be used later for specific payments, it is better to use other investment options.
Since a savings account is also used for the majority of expense payments, your lump sum amount may get affected unintentionally.
Rate of Return: Savings accounts in India pay an interest of 2% p.a. to 7% p.a.
Treasury securities or T-bills are government-backed short-term money-market instruments. The Reserve Bank of India (RBI) issues T-bills under its open market operations (OMO). These are zero-coupon bonds with maturities of 91, 184, or 364 days.
T-bills offer safety of capital and steady returns with less than one-year maturity. At the same time, you can also trade the bills in case you need money faster.
Rate of Return: ~ 7.5% p.a.
Fixed deposits are one of the most popular safe investments available in India. The best part is that you can invest in FDs directly through your bank account. Thus, parking excess funds away for short durations becomes quite easy.
Nowadays, you can open FDs ranging from 7 days to up to 10 years. You can also open FDs at the nearest post office branches. Post office FDs offer comparable returns and zero TDS.
Rate of Return: 2.5% to 8% depending on the duration
Recurring deposits are also traditional safe investments. With RDs you can invest small amounts regularly to build a large corpus. You can open RDs at your bank through your savings account or at a post office.
PORDs allow you to invest cash in small amounts and build a corpus in over 60 months.
Rate of Return: 4% - 8% depending on duration
Liquid mutual funds, ultra-short-term funds or money market funds are mutual funds which invest in short-term securities. Liquid mutual funds are great short-term investment options due to the following features:
- Money market-linked returns
- High liquidity with T+1 day withdrawals
- Zero exit charges
If you want to gather higher returns over an unknown short period, liquid funds are the perfect investment option. The capital gain on withdrawals before 36 months of holding will be added to your taxable income.
Rate of Return: 2% to 6% based on your holding period.
Debt mutual funds are the best investment option if you want to invest for less than five years but more than three years. Debt mutual funds offer market-linked variable returns. However, most debt funds can keep your capital safe despite volatility.
You need to invest for at least three years to benefit from long-term capital gain provisions. Also, most debt funds deduct exit load if you liquidate units before 36 months. So, you can avoid any such charges if you invest for more than 36 months.
Rate of Return: 6% - 9% p.a. depending on investment duration and fund type.
Corporate deposits are considered riskier than FDs or debt mutual funds. However, they also offer a higher rate of return. You can invest in corporate deposits for varying durations.
CD exit rules are much like bank FDs and you may lose a part of your interest on early withdrawals.
Rate of Return: 6% - 12% depending on the risk profile of the firm
National Savings Certificate is a 5-year deposit scheme which pays interest at the time of maturity. In the meantime, you can trade the certificate with other investors if you need urgent withdrawal.
Rate of Return: 6.8% (NSC VIII Issue w.e.f. 1st April 2020)
You can invest in equity mutual funds for less than five years. However, given the volatility involved in equity markets, it is wiser to have a longer horizon in mind. Even though, equity funds may allow withdrawals after only 12 months of investments your capital may suffer from an early withdrawal.
The best mode of investing in equity funds is through SIP. Here you invest a fixed sum at regular intervals. SIP allows you to have a lower average cost of units than the market. Thus, it is easier for your units to be profitable.
Rate of Return: Variable based on market conditions and investment duration
Stocks, commodities and derivatives can be short-term investment plans with high returns. Investments in stocks, commodities or derivatives are not subject to a minimum holding period. Thus, you can get in and out anytime and use these investments as short-term options.
However, these investments carry significant risks and you should be careful while investing. So, unless your risk appetite allows you to invest in these options, you should stick to investments with more stable returns.
Rate of Return: Variable based on market conditions
The primary purpose of investing in any short-term instrument is to keep the capital safe and earn a possible interest on it. For example, when you create an emergency fund pool you want to invest only in the safest possible options.
For this purpose, you park the money into super savers, fixed deposits and liquid funds etc. However, you should never put your emergency funds in equity stocks, commodities and derivatives, even though they allow high liquidity.
The top 5 short-term investment plans in 2022 in India are:
a) Savings Accounts
b) Recurring Deposits
c) Fixed Deposits
d) Liquid Funds
e) Corporate Deposits
Equity stocks, commodity futures, and equity derivative contracts are known for generating high returns in short periods. You can invest in these options for less than a day. Thus, these are short-term investments with high returns in India.
You can invest in short-term investment options for less than a day to an infinite period. For example, stock investments can be withdrawn on the same day. You can you’re your money invested in a savings account, liquid mutual funds, stocks, etc. for a lifetime.
Short-term investment examples include savings accounts, fixed deposits, liquid mutual funds, ultra-short-term debt funds, post office deposits, etc. Any investment which allows you to invest quickly and withdraw anytime can be a short-term investment. However, unless your objective is to multiply your money, you should seek out safe investments to preserve your wealth.
A short-term debt fund is a diversified debt fund investing in debt securities like corporate bonds and government bonds. This allows the fund to generate higher returns than money market funds, with almost similar safety. Short-term debt funds may invest a large part of their portfolio in money market securities to maintain higher liquidity. These funds are also known as income funds.
Yes, any investment is an asset. The only difference short-term investments have from other assets is that they are easily convertible to cash.
The best short-term investments for the middle class include the following options:
a) Savings Account
b) Fixed Deposits
c) Recurring Deposits
d) National Savings Certificate
e) Liquid Mutual Funds
f) Debt Mutual Funds
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