5 Best Short Term Investments To Reach Your Financial Goals
Short-term investments are ideal for investors eyeing to meet some specific objectives in the near future and may want access to cash at all times. It could be for downpayment towards a car or home purchase, for travelling, funding an educational course, etc.
Short-term investors generally have two expectations – first, to generate returns in a short period, and second, to have liquidity by their side at all times. Short-term investments are not to buy-and-hold; they are temporary investments, also known as marketable securities that may be readily converted into hard cash when needed. Read on to get more useful insights and the 5 best short-term investments.
What is a Short-Term Investment?
A short-term investment is where investors can stash their money for a short duration. Typically short-term investments are cashed out within five years. However, its investors may also cash out their short-term investments within 3-12 months.
Short-term investments essentially offer the security of invested capital and quick wealth creation. Companies and retail investors sitting on substantial cash reserves can make short-term investments to generate modest returns. Note that companies’ short-term investments will be classified as current assets on their balance sheets.
Short-term investments reduce the risk but might not be as good as long-term investments in generating returns.
5 Best Short-Term Investment Plans in 2022
We will evaluate the best investment plans for the short-term on three parameters: tenure of investment, liquidity, and expected returns.
1. Recurring Deposits
It allows investors to invest a specified sum of money each month. Recurring deposits are a popular and the safest short-term investment plan for six months.
- Tenure: Recurring deposits can be made for a minimum of 6 months and ten years. Investors can open recurring deposit accounts in multiples of 3 months, i.e., six months, nine months, 12 months, 15 months, and so on.
- Liquidity: Recurring deposits have a lock-in period of 1 month; if prematurely withdrawn, only the principal sum will be paid without interest.
- Returns: Recurring deposits are not known for paying huge returns; however, returns are guaranteed, and the returns keep changing from bank to bank. Currently, a 1-year recurring deposit will pay you around 3.00%-6.25% returns.
2. Fixed Deposits (FDs)
Unlike recurring deposits, in FDs, the entire investment is made in a lump sum. The deposit tenure and the rate of return are fixed when opening the account. Moreover, you’ll get the same interest rate for the entire duration of the fixed deposit even if the rates fall subsequently. Fixed deposits are often considered the best investment plan for three months.
- Tenure: Fixed deposit accounts can have tenure from 7 days to 10 years. On maturity, the investor has the option to reinvest the accumulated sum or to withdraw it.
- Liquidity: Fixed deposits can be prematurely withdrawn in cash crunch situations. However, the same is subject to a nominal penalty ranging from 0.5% to 1%.
- Returns: Returns offered by fixed deposits are guaranteed and have no bearing on market fluctuations. Fixed deposits have the same interest rates as recurring deposits. Currently, a 1-year recurring deposit will pay you around 3.00%-6.25% returns. Senior citizens are paid a slightly higher rate of interest than other investors.
3.Post Office Time Deposits (POTD)
Anyone above the age of 10 can open a Post Office Time Deposits (POTD) account to avail of the short-term investment scheme floated by India Post.
- Tenure: POTD is available with a tenure of 1, 2, 3, and 5 years, and the return for each tenure is prefixed. However, if you opt for a POTD of 5 years, you are eligible for tax deductions and understand section 80C of income tax.
- Liquidity: Premature withdrawal from the POTD scheme is not allowed before six months. Investors can withdraw their principal sum after six months; however, no interest will be paid.
- Returns: Returns for the POTD scheme are subject to reassessment every quarter. For the ongoing quarter, i.e, 1 April 2022 to 31 June 2022, the interest rates are as follows:
- 1 Year 5.5%
- 2 Years 5.5%
- 3 Years 5.5%
- 5 Years 6.7%
4. National Saving Certificates (NSC)
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.
- Tenure: NSC comes with a maturity period of 5 years. NSC can be opened with a minimum of Rs 1000 and multiples of 100. There is no maximum limit.
- Liquidity: NSC doesn’t allow premature withdrawal; the invested amount is only accessible after maturity. However, premature withdrawals are permitted in exceptional cases like the investor’s death.
- Returns: currently, NSC pays 6.80% interest per annum. However, the interest rates are subject to periodic revisions.
5. Large Cap Mutual Funds
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.
- Tenure: Large-cap mutual funds don’t have a fixed tenure; the investors can park their funds in such funds for any duration. You can pull out your investments in a day or keep them for a couple of years; the returns will vary accordingly.
- Liquidity: Large-cap mutual funds are the most liquid among the schemes we discussed. There is no lock-in period, and the investments can be withdrawn anytime.
- Returns: Compared to other investment plans for the short-term, large-cap mutual funds offer the highest returns. However, it should be noted that the returns are not guaranteed. If everything falls in place, you can expect returns as high as 10-15%. However, there’s also a possibility of negative returns.
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How to Plan for Short-Term Investments?
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.
What Constitutes a Good Short-Term Investment?
A clear line of distinction could be drawn among different short-term investment schemes on the basis of the following parameters:
Liquidity
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.
Risk
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.
Tax Efficiency
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.
Final Word
A proper framework of investment is required for short-term investments; since short-term investments are considered for realising optimal returns in a short time, you cannot err in your investment plan. A little extra return might not be worth considering the extra risk. It is best to go through the best short-term investment plans wisely and select the plan that best suits your financial objectives and goals.
FAQs
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: 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-averse investors undertake short-term investments to earn modest returns while ensuring the safety of capital. Cash is readily available at all times in short-term investments. Since the risk factor is lower, returns are also in the conservative range.
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.
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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.
