We have different goals in life – some are long-term goals like buying a house or generating retirement corpus, while others are short-term goals. Goals with a shorter due date, i.e. 1 week to 3 years, need short-term investment plans to be fulfilled.
But which is the best short-term investment plan for you? Is it an FD, bonds or mutual funds? Let’s find out:
What are Short Term Investments?
Short term investments are a type of investments that are made for a short duration ranging from a minimum of 3 months to a maximum of 2-3 years. Such investments are highly liquid, i.e. can be converted into cash instantly. Such investments are usually made to fulfil short-term goals like buying a car or going on a vacation abroad or giving out school/college fees.
Let’s understand in detail:
Short – term investments can be divided into 2 types as per their goals:
- Tenure of the goal: Emergency Goals (1 week to 3 months, like sudden sickness, home repairs); Ultra Short-Term Goals (4 – 12 months, like payment of advance tax, school/college fees or maybe an iPhone); Short-Term Goals (13 – 36 months like vacation abroad, loan EMI, wedding)
- Importance of the goal: divide into categories, things that can wait (vacation or an expensive mobile phone) and that cannot (hospital bills, school fees or home repairs)
- Keep your money for important goals in instruments with little to very little risk – like a bank FD or Post Office Time Deposits
- For less important goals, you may consider a riskier option – like a debt mutual fund
A simple example of short-term investment is putting your money in stock market, i.e. in shares of companies. Another example can be large-cap mutual funds.
These two carry different risk factors, i.e. where shares come with high risk and high return probability, SIP in mutual funds come with moderate risks and moderate returns.
Both these options are advisable only when you have good knowledge about stock market and also have a good risk appetite. Otherwise, bank FDs and government bonds are your best bet.
Best Short Term Investment Options in India
Some of the best short-term investment plans or options available in India as per the risk-return and accessibility factor are stated below:
Good investment options for short-term:
Bank Fixed Deposits (FDs) – good liquidity, highly safe, better returns than savings account – good option for those who do not want to take any risks while earning some returns
This is by far one of the safest options to park your savings. The interest is fixed and the risk is nil. This is perfect for those who wish to lower their taxable income by opting for the 80C deductions of up to Rs. 1.5 lakh in FD (as per the old tax regime).
Debt mutual funds (MF): liquid option offering higher returns than FDs – less risky than equity mutual funds
Debt mutual funds, also called as liquid funds, are funds where money is put into government bonds or corporate bonds. This means that the fund money is lent to only top-rated companies or government. In both the situations, risk falls quite lower as he probability of getting the money back is close to 100%.
These funds come with a tenure ranging from 1 day to 3 months. This means, if you need to pull out your money the very next day, it can easily be done – without any penalties. You get higher returns as compared to the bank FDs at lower risk in comparison to equity mutual funds.
There are 3 types of debt mutual funds that come with low risk:
|91 days or less
|Ultra Short Duration Funds
|3 – 6 months
|Low Duration Funds
|6 – 12 months
In all these funds, borrower continues giving interest on the borrowed money and at the end of the maturity period, the total amount (principal + remaining interest) is paid back to the AMC (Asset Management Company that manages your funds).
Short-term debt instruments:
Bonds, debentures, certificates of deposit, etc. are some short-term debentures which offer fixed but higher returns as compared to bank fixed deposits (FDs).
These instruments are binding by law in which the issuer (i.e. the debt/loan taker) has to repay the debt amount within 1 year to the lender (i.e. the debt giver). In this, while the principal amount is paid after 1 year, interest is to be paid at the agreed intervals.
Returns on these instruments are dependent on RBI interest rates, i.e. when RBI interest rates go high, returns go high as well.
Savings account in Small Finance Banks:
A good option can be to park a portion of your savings in a small finance bank which offers better interest rate as compared to established ones like HDFC or SBI. These banks are safe and are covered under DICGC or Deposit Insurance Credit Guarantee Corporation (an RBI owned organisation that takes care of your money in banks).
Some examples of the small finance banks in India:
- Suryodaya Small Finance Bank
- AU Small Finance Bank
- Equitas Small Finance Bank
- Fincare Small Finance Bank
- Jana Small Finance Bank
- Utkarsh Small Finance Bank
- Ujjivan Small Finance Bank
- ESAF Small Finance Bank
A portion of your income should always be kept in your savings account. There can be times when you need immediate cash, at any point in a day. In such situations, you must have the option to issue a check, go to your bank directly to withdraw funds or simply visit your nearby ATM and withdraw the required amount in cash.
Comparison of Best Short-Term Investments in India
Here is a quick comparison of the best short-term investment options available in India:
|Bank Fixed Deposits (FD)
|Moderate (up to 1% penalty on premature withdrawal)
|For Important goals – E.g. education fees, wedding
|For Important recurring goals – E.g. monthly bills/fees
|Debt Mutual Funds Some examples: L&T Overnight FundsQuant Liquid Fund Kotak Money Market Fund Kotak Savings Fund
|Lower than Equity Mutual Funds
|Higher than bank FDs and RDs
|High (Can be withdrawn overnight, in some cases)
|For not so important goals E.g. – luxury products (expensive mobile phones), vacation
|Government Bonds/Treasury Bills
|Fixed but lower than Debt MF
|For important emergency payments (with higher liquidity option)
|Very low to none
|High (Can be sold anytime)
|For Important objectives – but for longer duration like 2 or 3 years where appreciation effect can be cashed
|Shares (Stock market)
|High to Moderate
|High to Moderate
|Not so important – luxury products (expensive mobile phones, vacation)
While it is easy to get blindfolded by merely the return factor, you must never chase only the high-return options.
As they say, do not keep all your eggs in the same basket. Hence, it is advised to keep your portfolio balanced with a good mix of high-return instruments like shares and dividends and safe-options like government bonds and bank FDs while keeping a considerable amount of money in your savings account. This is because in case of an emergency where you need immediate cash within hours, it is best to go to an ATM and withdraw – something that is available 24×7.
Benefits of Short Term Investments
Some of the advantages of investing in short term investment plans are:
Liquidity or Accessibility – You do not have to park your money for long years to reap returns. Depending on your goals, you can invest your money ranging from 7 days to 365 days. This can of course go up to 3 years but mostly, short-term goals are wrapped up within a year or two, at the maximum. This offers you liquidity or accessibility to your invested money.
Lesser investment amount – Usually, short-term investments require short capital. Buying an expensive phone or laptop will definitely require lesser capital as compared to buying a house, right? This way, you get to multiply your existing money without having to lock a big amount. Your remaining amount is left free for you to use in your preferred manner.
Factors You Must Consider Before Making Short Term Investments
Before putting your money in any type of short-term investment plan, you must consider three main factors. These factors can profoundly affect your goal realization. These are:
- Safety of your capital – Is your capital, i.e. the principal invested safe or is there a chance of it to deplete? There’s one thing to earn low interests and a whole another scenario where even the capital you invested is at risk.
- Accessibility or liquidity – Will you be able to pull out your money in case of an emergency?
- Returns – Is the plan chosen sufficient in catering to your goals? Meaning – Will you earn enough to fulfil your short term goal for which you invested in the first place?
In a short term of up to 3 years, risk can be high. Also, it gets difficult to combat inflation. Therefore, it is important that you make your investment decision based on safety, flexibility and return – in this order only. Do not make the mistake of chasing high return options. This is because a higher return will almost always mean higher risk involved. And unless you are completely okay with jumping in this risk- wagon, choose the safer options.
Best short term investment options offering high returns in India are:
· Share market
· Large-cap mutual funds of up to 1 year
· Debt mutual funds
· Debt instruments like government bonds
Best short-term investment options for risk-averse investors:
· Bank FD for 2 or 3 years
· High-yielding savings accounts (usually in Small Finance Banks like Suryodaya Bank)
· Debt instruments like government bonds, treasury bills
Best short-term investment options for risk-taking investors:
· Share market (stocks)
· Debt mutual funds
· Corporate FDs offering higher returns as compared to bank FDs (not covered under DICGC)
Short-term investment plans are those plans that carry a duration of up to 2 years or sometimes 3 years. These are considered by those who have certain short-term goals and do not want to lock their idle money in long-term investment options like a PPF or a 5-year FD.
Yes. Short-term assets are also known as current assets as they are expected to be sold within 1 year. You own your money invested in an investment plan and not owe it, your investments qualify as your assets.
The following are some of the benefits of short-term investment plans:
· Highly liquid – in case of an emergency, you can take out your money and attend to your emergency, without having to pay penalties or exit loads for early withdrawal.
· Flexible – you can shift your money from your current plan to another as short-term plans do not come with long lock-in periods.
Where should I invest my money to get good return in short term?
A good choice to earn good returns in a short span of time can be to put your money in stocks. But with stocks comes heavy risk as share-market is a highly volatile place. With good research and probably taking professional advice, you might be able to earn good returns.
Another option can be mutual funds or MF. You can opt to invest in direct mutual funds in which you can invest your preferred amount whenever you prefer, or you may go for an SIP where your money will be monthly invested in your chosen fund.
Yes, you may invest in an SIP for 6 months. In fact, this is the minimum time that is required for an investor to keep their money in an SIP.
Consider the following options:
· Bank Fixed Deposit (FD) – Bank FDs are risk-free and provide fixed returns (covered under DICGC)
· Corporate Fixed Deposit – Offer higher returns as compared to bank FDs but are risky (not covered under DOCGC)
· Recurring Deposit (RD) – Safe and fixed returns (interest up to 6% approx. – higher for senior citizens)
· Shares – Higher returns as compared to other options given above but highly volatile (invest only if you are willing to take considerable risk)
You can start investing for Rs 1,000 in any of the following options:
· SIP in a mutual fund – slightly risky + unstable but potentially higher returns that RD
· Stocks – Risky + potentially high returns (proper research may reap good returns)
· Recurring deposit (RD) – for risk-free investment + fixed returns
Some long-term investment options in which you can invest with Rs. 1000 are:
· PPF (Public Provident Fund) – Risk-free + guaranteed good returns (currently 7.1% interest p.a.)
· NSC (National Savings Certificate) – Low-risk + fixed returns (currently 6.8% interest p.a.)