It's not necessary that all financial goals have to have a 10-year time frame. Sometimes the reason for saving is due to marriage planning for the upcoming year, saving for your emergency fund, or parking your bonus before you make the final decision. That's where short term investments come in.
The right short term investment choices depend on the time frame in which you expect to obtain the cash you invest. A 3 month goal is different to a 3 year goal and so on becoming an investor and many investors may think of the same short term investment plan for both; however the period of the investment should determine the investment instrument.
Ideally, you can figure out what you want to invest in the first place, and then select the plan that best serves your needs, instead of looking at the returns.
Best Short Term Investment Plans in India
Typically, short-term investments are classified based on the expected time of withdrawal of investment. Let's take a look at how this breaks down by the most common horizons.
Investment Horizon: 3 to 6 Months
1.Liquid Mutual Funds
These funds go for short term money market instruments such as treasury bills, commercial paper etc., and provide higher returns than a normal savings bank and still have funds being fairly liquid.
Strengths
A higher interest rate than a savings account.
There will be high liquidity, typically within 1 business day.
Compared to equity funds (low volatility).
Risks
No guarantees or warranties are extended about the returns which may vary slightly.
Exit load possibly applies in case redeemed within the first few days.
Does not benefit from deposit insurance such as a bank account
Best For
Those who invest idle funds for a couple of months but can easily access them.
Expected Returns
Generally between 6 and 7 per cent a year, although this varies with prevailing interest rates.
2.Savings Account
The most simple and easily available place to keep money is a savings account which is completely liquid and has a minimal risk.
Strengths
Any funds can be accessed at any time.
No risk to principal or staff
The locks are not required for the book, nor is there any trap to exit.
Risks
Of all short term investment options, the returns are among the lowest.
The return is generally not on par with the inflation rate.
Best For
Emergency funds or for cash which could be required very quickly.
Expected Returns
Typically 2.5-4% as per the bank of origin.
They are short term government securities issued at a discount and redeemed at face value with short term (tenors) of 91 days, 182 days and 364 days. Strengths Backed by the government, making them virtually risk free Certain returns that happen in advance are purchased at a reduced price. Involves the secondary market where products can be easily sold. Risks The returns are typically the lowest of any type of short term investment Investors must have a demat account or holding some platforms in order to invest. Best For Investors who are risk adverse and seeking a short term option that is backed by the government. Expected returns 6.5 to 7 percent per year based on the rate that is offered to auctions. A bank FD with a tenure between a few months to less than one year with a fixed interest rate is called a short term FD. Strengths Fixed, predictable returns Capital protection through programmed banks.Scheduled banks for capital protection. Willingness to negotiate (flexibility) with your timeline Risks When you're forced to make an early withdrawal, it's frequently met with a penalty. Interest rates won't have an impact on returns, even if they increase later in the year. Best For Investors who have a specific time in mind that they need the money, and desire to be certain of the return. Expected Returns Generally in the range of 6 to 7 percent annually, depending on the bank and tenure chosen. A FD having a short tenure between 6 months to 1 year provides a higher rate of returns than ones having a shorter tenure however, it is also one of the safer short term bank investment plans available. Strengths Predictable, fixed returns Scheduled banks capital safety. SMEs are available throughout banks and NBFCs. Risks When breaking the FD early, chances are that the return is not as high.The early withdrawal of the FD generally diminishes the return. The risks of returns falling short of inflation in some periods. Best For Investors with the tolerance for locking funds for almost a year for a fixed and assured return. Expected returns 6.5-7.5 percent per year, depending on the bank. Liquid funds are a viable option for investors who are not completely sure when they will need the funds in the coming year. Strengths Easy entry and exit. Higher than post tax efficiency as compared to FDs in some cases, depending on holding period. Low volatility. Risks There are no guaranteed returns, they are market dependent. Ebitry low liquidity benefit near the end of the year, compared to a short term FD. Best For Who would like to exit at any time in the horizon without a commitment. Expected returns Expected to be in the range of 6 - 7 percent. Money market funds are a type of mutual funds that buy short-term debt instruments such as commercial paper, certificates of deposit and treasury bills for stability with a slightly higher return than liquid funds. Strengths Low risk as other debt fund categories. Greater expected return than a savings account. Reasonable liquidity. Risks Return is not guaranteed as it is dependent on the securities held in the fund. If the fund has lower rated instruments then there is a level of credit risk. Best For Investors who wish to get a slightly higher return than liquid funds and are more conservative about their portfolios. Expected return Between 6.5 and 7.5 percent a year. Short duration debt funds are mutual funds that invest in bonds and debt instruments with a duration of usually 1-3 years, that seek to maintain a balance between returns and relatively low interest rate risk. Strengths When conditions are good for rates, return potential is better than FDs. Attractive to investors in higher tax brackets as compared to FDs, depending upon holding period. Substantial liquidity (no lock-in period). Risks Sensitivity to interest rates means that returns will tend to swing as interest rates change. The quality of bonds in the portfolio determines the credit risk. Best For investors with 1-3 years time horizon who are willing to take some risk for potentially better after tax returns. Expected returns From 7 to 8 percent per year, but fluctuate depending on the market. They are debt instruments issued by companies with a duration of 1 to 3 years, with a fixed interest payment. Strengths Typically offers better yields than those offered by government loans Regular and certain interests. Various tenures and issuers that you can select. Risks Bear the credit risk of the issuing firm's financial condition. Not as liquid as mutual funds as you can withdraw quickly. Not supported by the government. Best For Investors who would like to find higher credit for a fixed return but are ready to do the research and go through the hassle to know the credit rating of the issuer. Expected Returns Typically 8-10% per year, depending upon the credit rating of the issuer. FDs with tenure of 1 year and 3 years are relatively simple options, and may earn some of the best fixed rates in the FD ladder. Strengths Solid, guaranteed returns, irrespective of market fluctuations. Structured Banks' Capital protection. Easy to open and monitor. Risks The effective return is lessened with premature withdrawal. Bigger is better; return is fixed regardless of if there are better rates later. Best For Investors who can't handle risking a downturn in the market. Expected Returns The bank's and tenure's expected returns range from 7 to 7.5 percent per year. Be aware of the exact time frame because if it is less than 6 months, they can go for liquid funds, T-Bills or short duration debt funds or short term FDs, but if it is 1- 3 years then they can go for short duration debt funds or corporate bonds. Look at liquidity requirements: savings bank accounts and liquid funds can be withdrawn almost immediately, whereas fixed deposits and corporate bonds will have exit penalties or may not be as liquid. Consider your risk appetite as savings accounts and T-Bills have negligible risk, while corporate bonds and short duration debt funds have some credit risk and/or rate risk. Consider taxation, since the interest income in FDs and bonds is generally taxable as per income slab, while some debt fund categories may have various tax classifications. Make sensible returns expectations as you can get better returns than a savings account or T-Bill from options such as corporate bonds or short duration debt funds, but they are likely to carry more risk with them. While there is no one-size-fits-all short term investment plan, it mainly depends on your unique timeframe, liquidity and risk tolerance. If your investment horizon is very short (less than 6 months), then you should prioritize safety and accessibility, which means liquid funds, T-Bills and savings accounts are suitable options. More options with higher risk may be considered as the time horizon widens to 1 – 3 years, such as short duration debt funds or corporate bonds. With short-term investments, the focus is on getting the right instrument for the time frame, rather than on getting the best return. Regardless of the return on investment, a plan that requires you to end an investment prematurely or one that can't meet a person's requirement when he or she needs the money is a plan that fails. 3.Treasury Bills Treasury Bills (T-Bills)
4.Short term FD
Investment Horizon: 6 Months to 1 Year
1.Bank FD
2.Liquid funds
3.Money Market Funds
Investment Horizon: 1 to 3 Years
1.Short Duration Debt Funds
2.Corporate bonds
3.Fixed Deposit (FD)
Short Term Investment Plan Comparison Table
Factors To Consider Before Choosing A Short Term Investment Plan
Conclusion