Individuals who are not inclined to wait for longer periods set themselves shorter targets or objectives and plan accordingly to fulfil them. These plans fulfil short-term financial goals of investors. Short-term investment plans are suitable for meeting expenses that may arise in the future.
For example, let’s say one of your children has started college and he/she plans to do higher studies at a foreign university. You can consider investing in short-term plans which will help your child when he/she completes graduation and intends to go abroad for higher studies.
These plans do not provide huge wealth as long-term plans, but they provide optimal returns capable of covering expenses that may arise in the near future.
Here are some of the best short-term investment options:
This option allows individuals to make regular investments. Individuals keep on investing a fixed sum at regular time periods, and on maturity or redemption, they receive a hefty lump sum amount from the banks. A recurring deposit account is one of the easiest and most user-friendly short-term investment plans.
The minimum tenure in these plans is 6 months. After the first 6 months, one can extend their RD account in multiples of 3 months and up to 10 years. It comes with a lock-in period of 1 month. In case an investor withdraws or closes his/her RD account within one month, then he/she will receive only the principal amount. If one opts for a premature withdrawal or redemption, then the rate of interest is applicable for the deposit period only.
Financial institutions start computing interest from the date of the first instalment. Interest received on these investments is added to an individual’s taxable income and taxed as per applicable slab rates. However, there is a provision for TDS if the interest amount exceeds Rs.10,000 per annum.
These are one of the most popular investment options for the short term. Under this, an investor will deposit a lump sum with a bank for tenures ranging from 7 days to 10 years and earn interest on the investment amount. Upon maturity, many banks offer the option of reinvestment. One can reinvest the proceeds received from an existing fixed deposit. It allows compounding of interest income and helps in wealth accumulation.
These investment plans have moderate liquidity. Some banks may allow premature withdrawal, whereas some may prohibit the same. Investors can use the process of laddering instead of locking in their funds for a certain period. Under this, one must spread out their investment amount among different maturity periods. On maturity, FD of the shortest tenure is reinvested with the one with the longest duration. This continues with successive maturities; it provides investors liquidity and helps them tackle reinvestment risk.
Individuals receive returns as per interest rates decided by banks. However, these rates are aligned with RBI’s repo rates. Investors can receive the interest component in their bank accounts monthly, quarterly or annually. Senior citizens are eligible to receive 0.5% more than normal FD rates.
Interest earned from fixed deposits is taxable. The interest income is added to the GTI of an individual and taxed as per the applicable slab rate.
Apart from banks, many companies also provide fixed deposit options for investors. Companies use this to raise money to finance their activities. Just like a normal fixed deposit, company FD also provides interest to depositors.
However, company FDs are quite a risky option as they are unsecured deposits, and in case of liquidation, a company’s depositor has the last claim over a company’s assets. Unlike bank FDs, DICGC does not guarantee a company’s fixed deposits.
These plans may or may not be liquid, as premature redemptions vary from company to company. There may be charges or heavy penalties for early withdrawals. Returns on these plans are higher than normal fixed deposits as these are unsecured and have a high risk of default. Investors can opt for interest payments either monthly or quarterly as per their convenience, which get credited to their bank account.
Interest income is taxable under the Income Tax Act of 1961. It is added to total income and taxed as per the respective slab rate. Companies are liable to deduct TDS before paying interest if the total amount crosses a certain threshold.
These deposits are very much similar to bank FDs in their structure and working. One can put in their money with post offices and earn regular interest on them. These deposits come with an investment horizon of 1 year, 2 years, or 5 years. The time deposit comes with a lock-in period of six months. Individuals cannot withdraw prematurely within the first six months. After this, they can withdraw, but the interest they will receive will be at a reduced rate.
The Government of India determines interest rates on post office time deposits. It revises the rates every quarter according to macroeconomic conditions. These deposits also come with a sovereign guarantee and hence have zero risk associated with them. However, one will receive interest payments annually at the end of every financial year. Interest income from these deposits also has the same tax treatment as other time deposits.
T-bills or treasury bills are lucrative short-term debt instruments. These are issued by RBI on behalf of the Government of India. They provide decent returns to their investors and have high liquidity. Tenure of treasury bills ranges from 91 days to 365 days.
T-bills do not provide any interest component to their investors. They are issued to individuals at a discount and, at the time of maturity, redeemed at face value. The difference between the issue price and maturity value serves as an income component of this investment. With the low risk and guaranteed returns, treasury bills are one of the best short-term plans for 6 months duration.
These mutual funds are popular short-tenure investment options. Individuals can allocate their funds to these mutual fund schemes to earn stable returns. A few examples of debt funds include liquid funds, ultra short duration funds, low duration funds and money market funds.
NSC is a government-backed fixed return saving bond scheme. NSC brings you a tax deduction of up to Rs.1.5 lakh under Section 80C of the Income Tax. NSC maintains a low-risk profile and can be opened at any post office branch.
Large Cap Mutual Funds are suitable for investors with an appetite for moderate risk. Investing in large-cap mutual funds is the best short-term investment plan for high returns. Such funds invest in the stocks of top 100 companies having a market capitalization of 20,000 crores or more. These companies are industry giants, they are expected to deliver robust growth, reflected in the returns. Large-cap funds are not known for aggressive returns but are less volatile to market fluctuations.
Some benefits of short-term investment plans are as follows:
Companies and individual investors plan to invest their money with a short investment horizon as it helps them in protecting their capital while getting decent returns. Corporates with a positive cash flow in their books opt for this investment. They can park their surplus or excess cash for the short-term in investment avenues like stocks, bonds, treasury bills, etc.
It allows them to earn higher returns than what they would have earned had they kept their money in regular savings deposits. Retail investors go for these plans as they offer significant returns along with substantial liquidity. In addition, these investment plans have low to moderate risks and hence are quite popular among small investors as well.
Financial goals can vary, and not all of them provide you with the luxury of having a long investment horizon. Some goals need a definite corpus in a short while. Thus you must strategize your investments as per your needs and their timing. Timing is of utmost importance here, and your plan should be such to ensure the availability of money for the specified goals and also at any time during the investment period.
Determine the risk you are willing to accept and find the class of asset that falls in the risk category. For instance, risk-averse investors should consider government securities, fixed deposits, recurring deposits, etc.
Once the investment is made, regularly evaluate if the investment strategy is working for you. The best way to do it is to compare the actual returns with those planned while making the investments.
A clear line of distinction could be drawn among different short-term investment schemes on the basis of the following parameters:
Money should be there when you need it. Short-term investment plans are known for the ease with which money can be pulled out. Preferably the lock-in period should be low, and the penalty for premature withdrawal should be minimal.
Since short-term investments focus more on capital protection, minimum risk should be accepted. Within the best short-term investment plans, risk can vary significantly. For example, large-cap mutual funds carry a significant risk while fixed deposits carry minimal risk. A risk-to-reward assessment should be done to check if the risks involved are justifiable for the returns.
Returns from most of the plans we discussed above are included in the total income of the receiver and taxed as per the slab rates. However, some plans like large-cap mutual funds and NSC offer additional tax deductions.
Short-term investment plans are some of the most popular options for investors who do not wish to stay invested for a long period. High liquidity and decent returns have made them a very lucrative option to invest in. However, investors must conduct a thorough market analysis before deciding to make short-term investments.
Ans: Fixed deposits issued by banks are a safe investment option for short-term investors. Deposit Insurance and Credit Guarantee Organisation provides insurance of up to Rs. 5,00,000 to every depositor. This means that in case of liquidation or default by banks, DICGC will pay the investors up to a maximum limit of Rs. 5 lakh on the bank’s behalf.
Ans: Low duration funds are a type of debt mutual fund which invests in short-term debt securities. The Macaulay duration (weighted average maturity period) of these funds’ portfolios is between 6-12 months.
Ans: Typically short-term investment plans have a maturity period of up to five years. However, investment plans have a maturity period of as low as seven days ( fixed deposits).
Ans: An individual can open an FD in a post office via the online or offline method. In case of the online method, they need to follow these steps:
Step 1: Visit e-banking portal of India Post.
Step 2: Login using credentials or sign in if one is a new user.
Step 3: Click on the Service Request section under the General Services tab.
Step 4: Continue following directions coming up on the screens and then go to the new request section to open a post office time deposit account. In case of the offline process, individuals need to visit their nearest post office branch and fill out the FD account opening form. After formalities are completed, they can transfer the money to this account and start their investment.
Ans: Yes, individuals can invest in the stock market for the short-term to generate returns that can help them meet unforeseen expenses. If one has adequate market knowledge and chooses the right shares, it can give them tremendous returns in a short span of time.
Ans: Equity funds or hybrid funds like balanced advantage funds, large cap funds, etc., are options other than debt funds that one can consider investing in. One must make sure to consider different aspects like financial goals, risk appetite, expense ratio, etc., before investing in mutual fund schemes.
Ans: For an investment period of 6 months following are the best-suited investment alternatives:
– Recurring deposits
– Fixed deposits
– Debt securities
– Large-cap mutual funds
– Corporate deposits etc
Ans: Risk and returns always go in the same direction. For high returns, you need to accept high risks, and there is no investment with minimum risk that offers huge returns. Still, investment plans like Fixed deposits, NSC’s Post Office Time Deposits, and Recurring deposits offer decent returns, and the associated risks are very low.
Ans: Those just starting their investment journey are advised to start with less risky alternatives. Once you get used to the world of investing, you can also explore risky investments. To start, you can invest in government securities like fixed deposits, recurring deposits, NSCs, etc, and debt securities that offer fixed returns.
Before you go…
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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