For short-term goals or pre-decided expenses like buying a motor bike or paying for your college fees the next year, a 1-year investment is a good option to go for.
Let’s dig deep and know some of the best 1 year investment plans in India along with the benefits of short term investment.
What is 1 Year Investment Plan?
The name says it all – an investment plan for a period of 1 year is known as a 1-year investment plan. Such investment plans are targeted to cater to the short-term financial goals of investors. These plans are usually not as high-yielding as a 5 or 10-year investment plan but they are ideal for goals like raising funds for an expensive vacation or buying a motor vehicle or paying school/college fees. Instead of putting all your money in a bank savings account, isn’t it a better idea to divide this money and put some in a 1-year plan. This way you do not suffer from fund-freeze and also earn higher returns as compared to a 2-3% interest in a savings account.
Options for Best Investment Plan for 1 Year
Some of the best options you can consider when planning to invest for 1 year are explained below:
Safer Options with Low to Moderate Returns:
- Bank Fixed Deposits (FD): Bank FDs are one of the safest investment vehicles that offer guaranteed returns in the form of fixed interest rates to the FD holders. This is a good option for the risk-averse investors, i.e. the ones who do not want to take risks and want to ensure their money is safe from market ups and downs. Bank FDs and better than bank savings account for one reason – higher interest rates.
- Sweep-in FD: This is a good option for those who do not wish to lock their money in FD but want to earn FD interest. In a sweep-in fixed deposit, a set amount is kept in your savings account and the excess is automatically transferred to FD. This way, you get to enjoy the liquidity of a savings account while earning higher returns of an FD.
- Corporate Fixed Deposits (FD): Corporate fixed deposits are FDs that one can open in a corporate like Bajaj Finserv, ICICI Home Finance, LIC Housing Finance, HDFC Ltd. Etc. These companies are authorized to issue FDs but are not covered under the DICGC*. To combat this, corporate FDs come with higher FD rates as compared to bank FDs. These rates can go up to 8% which is any day better than bank FDs in terms of returns.
However, you must always note that higher interest rates are offered because of the risk involved – i.e. credit risk. If the company dissolves, you might not get your money back. Therefore, it is important to check the credit rating of the company before investing your money in a corporate FD.
- Debt instruments: Options like government bonds and treasury bills are safe since these are issued by the government of India. Also, these offer guaranteed returns as the interest rate is fixed. The returns are usually higher than savings accounts and bank fixed deposits.
*DICGC – Deposit Insurance and Credit Guarantee Corporation – a wholly-owned RBI subsidiary that provides insurance up to Rs. 5 lakh to bank deposit holders. Corporate FDs are not covered under this insurance.
Moderately Safe Options with Better Returns (as compared to the above options):
- Debt mutual funds: These mutual funds are safer than equity mutual funds because the fund money is invested in debt instruments rather than stocks. This helps mitigate market risks and earn potentially higher returns. Following are the type of funds to consider:
- Low Duration Mutual Funds (6 – 12 months)
- Money Market Mutual Funds (up to 1 year)
- Short Duration Funds (1 – 3 years)
Benefits of 1 Year Investments Plan
Why should I invest in 1-year Investment Plans: Advantages of 1-Year Investment Plan
- Helpful in fulfilling short-term goals – no need to lock money in longer plans for pre-planned expenditures like paying for higher studies, a vacation next year, or buying a vehicle.
- Your money is accessible (good liquidity) – You can pull out your money easily after the completion of 1 year instead of having to wait for 5 years like in a tax-saving bank FD or 15 years in the case of a Public Provident Fund (PPF).
- Low risk involved – Most short-term investment plans carry very little to low risk, except for the share market. And for short-term goals, it’s always better to add safer options in your portfolio to limit credit risk*.
- Better than parking your savings in a savings account – Keeping a portion of your funds in savings account for immediate expenses is important and not bad at all. But keeping all of your money in that savings account offering you no more than 3% interest is not a good idea, at least in terms of returns. Your money must earn for you – at least keep it where it beats inflation!
“Do not save what is left after spending; instead spend what is left after saving.” – Warren Buffet.
*Credit Risk – This is a risk where your invested money, i.e. the principal money is not returned. This happens when the company you invested your money in liquidates or in simpler words, shuts down. This may happen when you invest your money in small-cap companies. Although such companies have the potential to soar high in the market, if the market goes down, the impact is likely to bring considerable negative impact on your portfolio.
Who should NOT invest in 1-year Investment Plans:
Those looking for higher returns:
Due to the short time of investing your money, many times you might not be able to beat the ups and downs of market if you are investing in the share market. This is because in the long run, the volatility of the market due to these ups and downs in the NAV of your shares can be mitigated. Likewise, in the case of options like a fixed deposit, you will lose on the power of compounding that really benefits if you’ve invested your money for at least 5-7 years. The same logic applies to mutual funds as well.
Factors You Must Consider Before Making 1 Year Investments
Before you put your funds in a 1-year investment plan, we urge you to ponder upon the following points:
- Have you taken care of your immediate and necessary expenses already?
Before you invest your money anywhere, it is important to put the funds aside that you know you have to spend on the basics, like paying utility bills or school fees for your child. If not, what’s the point of locking your money for 1 year and then taking it out prematurely?
- Evaluate your risk-taking capacity
While options like a bank FD, post office time deposits, or government bonds are of utmost safety and you don’t have to worry about the credit risks, options like buying stocks of a listed company or corporate bonds or corporate FDs do come with certain risks. Evaluate these thoroughly before signing up for any such option.
- Is the plan chosen liquid enough?
While it is important to keep some amount liquid in your bank savings account that you can withdraw anytime, you must know that an unforeseen event may knock on your door too – anytime. And it may be more than your savings account balance. For this, do make sure to diversify your portfolio, i.e. invest a portion in liquid options like a small finance bank savings account or an FD which does not levy a heavy penalty on premature withdrawal. You may also consider dividing your savings in debt funds where the maturity period is less than 1 year and the exit load is little to none.
- Are you looking for assured returns?
If your goal is to earn a certain amount by the end of the year so that you may fill the deficit in your budget and start your vacation or buy that bike, you must consider plans that are offering guaranteed returns. Otherwise, you may opt for the share market and only after a thorough evaluation, go for the share market and earn higher returns as compared to guaranteed returns from an FD or debt instruments like treasury bills, bonds, etc.
Documents Required for 1-year Investment Plan
Like any other investment option, you need the following documents:
- PAN Card
- ID Proof (Aadhaar, PAN Card, Passport, etc.)
- Address Proof (Aadhaar, Passport, Bank A/c statement, etc.)
- Passport-sized photograph(s)
- Demat Account with KYC (for trading in the stock market)
There is no single investment plan that can be carved out for 1 year. According to the preferences of the investor (risk-return factor, liquidity, etc.). Some of the good options are:
Debt mutual funds – safer than equity funds with potentially good returns (higher than FDs and bank accounts)
Debt instruments other than MF – very safe with guaranteed returns
Bank FDs – very safe with low but guaranteed returns (currently FD rates do not beat inflation)
Corporate FDs – a little risky (since not covered under the DICGC) but higher interest rates as compared to bank FD rates
Small Finance Bank Savings Accounts – Very safe with higher interest rates offered as compared to commercial banksShort-term investments or best term plans for 1 year are those types of investments that are converted into cash without any hassle, usually within 5 years.
Yes, you can invest in an SIP for 1 year. The minimum period required to stay invested in an SIP is 6 months. Beyond this, you may choose your tenure as per your requirements.
The amount you wish to invest depends on you. Apart from the factors like your income and your annual budget, you need to evaluate the amount which you wouldn’t want to take prematurely out of your 1-year investment plan.
However, it is better to spread your funds in various options rather than keep it all in one or two places.
You may consider options like debt mutual funds, fixed deposits (FD) with a 1-year tenure, bonds, etc. if you wish to invest for 1 year. For risk-takers, share market is a good option, else consider former options.
Some of the short-term plans offering potentially high returns in India are:
1. Debt mutual funds (liquid funds, overnight funds for up to 3 months, Ultra Short Duration Funds for 3 – 6 months and Low Duration Funds for 6 – 12 months)
2. Stock market – Consider adding shares from small-cap, mid-cap and high-cap companies listed in the stock market to keep a good balance between returns and risks (A good idea would be to take help from a professional in the field, if you’re new in this arena.)
3. Post Office Monthly Income Scheme – Offering 6.6% interest rate p.a. payable monthly – This is good for those who want to take no risk but higher returns – max. investment amount Rs. 4.5 lakh and Rs. 9 lakh in a joint account.
If it’s a mutual fund:
– Go for SIP if you are a beginner with little knowledge about how these funds work.
– If you’re an experienced investor in the share market and understand the ups and downs of the market, go for the lumpsum mode of investment.
If it’s any other investment vehicle with a fixed interest rate:
– Go for SIP if you do not want to lock your funds at one go – this will give you better access to your funds but you will earn lesser interest
– Choose lumpsum if you’re okay with locking your amount for the tenure of your investment – this will limit your liquidity but will ensure you earn higher returns