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Best Short-Term Investment Options in India

Best Short-Term Investment Options in India

Short-term saving plans

Short-term investments have a very important role in our investment plans. The main role of short-term investments thru savings plans is to preserve your money for a specific goal. For example, your child’s admission for graduation or post-graduation is under process.

Meanwhile, your long-term investment for this very goal has matured and the money is transferred to your bank account.

Now you have a choice, keep the money in your primary bank account or park it somewhere else. If you need to pay the fee in a few days it doesn’t matter. But if you still have a few months before the actual fee payment and other expenses, you would want to park the money somewhere else.

Tenure of Short-Term Investments

This somewhere else is what we consider a short-term investment. However, you may even end up with longer gaps between your investment’s maturity and goal’s achievement.

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.

Thus, our definition of short-term investment would not follow the typical definition of short-term investment products in the market. But, the time we often end up with after maturity of investment until the goal’s execution.

Few other assumptions we are making is that you do not need additional tax deduction on your investment. Also, there are very few investment options which allow tax-free maturity within five years of investment. So you should consider all the options regardless of their tax status.

Short-Term Investment Options

So, for this article, short-term investments will be those which let you invest a large sum of money for up to five years. Here are five such investment options for you:

Unit-Linked Insurance Plans

ULIPs carry a lock-in period of five years. So, the first condition would be to only invest in a ULIP plan if you are certain with the tenure, that you can stay invested for five years in the plan. If you can, you could be in for a tax-treat.

All you need to do is, make sure your life cover in the ULIP plan is at least 10 times of your annual investment. If your premium in a life insurance plan is less than 10% of the sum assured any maturity proceeds are exempt from tax under section 10(10D).

Check the case below to understand how to use ULIP to your advantage when you can only invest for five years:

1. Assuming you have accumulated Rs. 40 lakhs for the marriage goal of your child and you still have about five to six years until marriage

2. The first step is to park this entire money in a liquid fund. Or, if you feel confident enough, divide the money into three parts and invest in the following order:

  • Invest Rs. 16 lakhs in a liquid fund
  • Invest the remaining Rs. 16 lakhs in a debt fund
  • Start a ULIP plan with

    i. Policy tenure and premium payment tenure of five years

    ii. Rs. 8 lakhs as annual premium

    iii. Sum assured of Rs. 80 lakhs in the plan

    iv. Allocate entire premium into the debt fund

3. For the next two years you will withdraw Rs. 8 lakhs from the liquid fund and invest in the ULIP plan

4. You will need to pay a nominal tax on your withdrawals from liquid funds based on the fund’s earnings

5. Your third and fourth policy premium will come from the debt fund.

6. Since you withdraw this money after three years of investment, your gains from the fund will benefit from indexation. You will still need to pay tax but a lower amount.

7. After five years whatever you have accumulated in the ULIP plan along with any gains on investment will be completely tax exempt.

Bank FD & Post Office Term & Recurring Deposits

Bank and Post Office FDs can accept large sums as deposits and offer a fixed rate of interest. Interest would be taxable every year based on your income tax slab. However, your money gets sufficient protection over a short period.

Maturity value you will receive from FDs is not taxable, as you have already paid tax on the interest.

Liquid Mutual Funds

Liquid mutual funds are another great option to park your money for short periods. Especially if you need to save for less than a year. There are no entry and exit charges, investment risk is very low, you may earn more than the bank FD.

If you hold liquid fund investment for less than three years the gains are counted as short-term capital gains and added to your taxable income. But if you hold for more than three years, you get the indexation benefit and a 20% tax rate applies to the gains after indexation.

Indexation refers to the gains being adjusted for inflation. Indexation can reduce your taxable gains by more than 50%. This benefit is not available on bank and post office deposits.

Debt Mutual Funds

Debt mutual funds would be a better investment if you have more than three years to stay invested. Debt funds may apply an exit load on investment if you withdraw within one year. While tax treatment of debt funds is the same as a liquid mutual fund, you do have a better chance of earning more in debt funds.

So, invest in debt funds if your investment tenure can be more than three years.

Benefits of Such Investment Plans

  • You distributed your tax liability over five years. Paying small amounts for a few years is better than paying a huge amount in one financial year.
  • You have better peace of mind, as you don’t have to pay huge taxes at the same time as you are trying to fulfil the goal
  • Your family had the protection of the life cover in case anything happens to you in the meantime

The only limitation this plan may face is that if you have an overall 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 can also contact a financial advisor to help you with this short-term investment plan.

Speak to an insurance specialist now!

Frequently Asked Questions (FAQs) for Term Insurance Plans

A person can only purchase a term insurance plan till the age of 65 years, and they can choose the risk coverage for up to 99 years of age. One can easily buy the best online term plan between the age of 18 to 65 years.

This being a term insurance plan doesn't offer any payout after maturity or expiration date

Each insurance company has its own term insurance premium calculator. If you want to check out the premium quote, go for the iSelect Star term plan calculator. It gives a premium amount based on your age, gender, habits, education, and annual income.

You can purchase an iSelect Star term plan anytime between 18 to 65 years of age. This is a term plan with return of premium option – that means all the premiums paid throughout the tenure will be paid back to you if you outlive the policy.

It depends on your needs. For example, if you want to cover a child's education or wedding expenses, you have to include them in your coverage. Your premium will be calculated accordingly when you buy the best term plan in India.

If your key purpose is to give your Family financial protection, go for the best term insurance plan. And if you want some savings, in the end, go for a traditional life insurance plan. iSelect Star is a term plan with return of premium option. All the term insurance premium will be paid back to you, if you outlive the policy term.

Go for at least 12 times cover than your annual income. Or you can go as far as 20 times coverage as per your needs.

The right time is when you don't have anything to keep your Family safe from financial storms, and they rely on you for financial needs.

If you are unable to make the payment or suffering from a terminal illness, the best term insurance plan pays a part of the sum insured to treat your disease.

Term life insurance plan riders are attachment or endorsements made, while taking the term insurance policy, as a supplementary coverage to policyholders. Apart from the core death benefit, term insurance plan riders offer below-given additional benefits:

  • Accidental Death Rider When a person suffers from a terminal illness, his/her family ends up spending a significant amount in treatment and medical expenses. Accelerated death rider pays a part of the sum insured in advance to cover such costs and save the family from running out of cash.
  • Accidental Disability Rider If the policyholder can't pay the premium because of an accident or permanent disability, a sudden disability this pays the premium on behalf of the policyholder till completion of policy term or for a defined duration.
  • Critical Illness Rider If the insured person gets a heart attack, cancer, or any other critical illness, this rider pays a lump sum on valid diagnosis.
  • Premium Waiver Rider If the policyholder is unable to make payments due to income loss or disability, a premium waiver rider waives off all future premium payments. And the term insurance policy remains active until the expiration date.
  • Income Rider: This rider in a term insurance plan ensures that your family receives regular income + sum insured in case of unfortunate demise of life insured.

Anyone can go for life insurance as it offers some savings after the maturity date, but it doesn't cover the protection of your family . The best term insurance plan is solely designed for taking care of loved ones if something happens to you. Term insurance plans act as a shield between your family and sudden financial fall. They make sure that your family lives a healthy life even after you. With a little amount paid per year, you can be worry-free from the family's financial conditions.

Questions that you need to ask while Buying the Best Term Insurance Plan?

  1. 1. Are you buying a term plan with return of premium?
  2. 2. Amount of premium you have to pay based on your age, habits, education, and monthly income
  3. 3. The total number of benefits covered in the term insurance plan. Do they include benefits that you care about the most?
  4. 4. How to save money on tax if you pay for the term life insurance plan?
  5. 5. Do they offer regular income options?
  6. 6. Can you change the coverage and premium in the future?
  7. 7. Does the claim consider valid if death occurs outside India?
  8. 8. Which kind of death is not covered by a term insurance plan?
  9. 9. Can NRIs take a term insurance plan? If yes, what are the conditions?
  10. 10. Does the term insurance plan have a cash value if you decide to cancel the term insurance policy?
  11. 11. Under what circumstances can a term insurance plan be cancelled?
  12. 12. Can I pay the premiums online or make electronic payments?
  13. 13. What will happen to the term life insurance plan if the life assured starts smoking after purchasing the policy?
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