Through this blog, we shall make you aware as to What is a Short term Investment? You will also become familiar with the popular and Best Short Term Investment Options in India.
What is a Short Term Investment? Meaning
Short term Investment is one where money is invested for a shorter period to meet your short term objectives.
Short term can range anything from few days to few months to few years as per your requirements and financial objectives. But, generally a period of 1-3 years is defined as short term.
In simple language, a short term investment plan is where the money is invested for a shorter period ranging from few days to a maximum of 3 years. However, there might be opinions where a period upto 5 years is termed as short term.
Short term investments are usually done with a lesser amount of money. The motive is to yield a constant or slightly variable returns but not so high returns, with relatively lower risk factor involved.
However, if you tend to invest larger amounts for a shorter period, you can’t expect to get high returns. To reap good benefits you need to widen your risk horizon and think and plan for your long term investments as well.
Short Term Investment: Objectives
Now coming to the point, your short term objectives might include anything ranging from:
- Buying your favourite car say after 2 years.
- Renovation/expansion of your house next year.
- Purchase of trendy furniture or new electronic items.
- Planning to go for higher studies in the next few years.
- A family vacation in India or abroad after a year or so.
- Buying a gold necklace/a diamond ring or a beautiful present for your wife on her birthday (Just like a loving husband would do).
- Or any other of your short term goals for that matter…and the list goes on…
So, firstly you have to make yourself clear that short term goals are the ones which you want to achieve in a shorter duration. These can be met only if you have some money parked in short term investments.
Short term investment plans should give you flexibility to withdraw your funds in the shorter period. Also, it should be easier for you to convert them into cash as and when required. So, short term investment plans help to attain your short term goals in an effective manner, wherein there is an easy facility to convert your investments to cash.
Hence, we shall be highlighting 7 Short term Investment options comprising of both risk free and risky options, for you to choose from.
Keep reading further to know the details…
Explore all the investment options,select the one that fits in your Financial portfolio and make it the best for you. Individual preferences may differ based on your financial goals. You and your friend might have different financial goals to achieve and hence your short term investment choice may vary.
This is a bit lengthy post, so just grab yourself a cup of tea or coffee to accompany you and keep adding to your knowledge…
7 Best Short Term Investment Options in India:
Here’s a list of some popular ways in which you can invest money for short term in India:
1. Savings Bank Account:
The simplest and the easiest way is to keep your money in a Savings Bank Account. The biggest advantage of putting your money in a Savings Account is that there is zero risk percentage. The returns may not be so high but it is a highly liquid investment. You can get ready cash as and when need arises.
Moreover, with facilities like net banking and ATM cards you can easily access your money anywhere and any time. Public sector banks normally have low minimum balance requirement as compared to private sector banks. But, as far as customer service is concerned, private banks generally win the race.
Banks usually provide interest ranging from 4% to 6% on such saving accounts.Interest is credited quarterly or annually into your savings account as per the bank rules.
As per Section 80TTA of Income Tax Act, an Individual and HUF can claim a deduction of upto Rs.10000 on interest earned. The Interest on your saving account in excess of Rs.10000 shall be taxable as “Income from Other Sources” at the prevailing tax slabs. This deduction is over and above the Tax deduction U/s 80C that is restricted to Rs.1.5 lakhs.
2. Short Term Fixed Deposits (FDs):
Keeping your surplus money in the form of Fixed Deposits has also been a common practice since ages. You can give your money to the bank for a specific period ranging from few days to 10 years. The amount will yield a fixed rate of interest ranging from 7-8% depending upon the bank scheme and duration of FD. Banks usually provide FD investors with high interest rates than a regular saving accounts.
But,one thing you have to be clear about is that Fixed deposits are not inflation beating instruments. The FD interest rates of 7-8% that you hear about are pre tax rates. Banks deduct TDS on Fixed Deposits where the interest exceeds Rs.10000 per year.
It is normally a good investment option for Senior citizens who hesitate to take any risk. Moreover, now you can book as well as redeem FDs online and prevent yourself from the hassle of standing in long queues in the bank. As and when you redeem an FD online, you get the amount credited to your savings account.
You can also opt for Tax saving FDs that will give you tax benefits as well. But,tax saving FDs are for a minimum of 5 years so if you have to meet your short term goals, these might not be the perfect fit for you.
To have a deeper insight on tax saving FDs you can refer: Tax Saving FD -one of the popular tax saving option!
3. Short Term Mutual Funds:
In India many people are still reluctant to invest in mutual funds. But, it is a good short term investment option if you are ready to take some risk and chose to diversify your funds.
Mutual funds are instruments that pool in savings of various investors to invest them in shares, debt securities, money market securities etc.
In simple words,Mutual funds further invest your money in:
- Debt Instruments – Debt Mutual Funds.
- Equity – Equity Mutual Funds.
Debt funds are considered a safer option because of their underlying asset is debt. But, based on historical data, Equity funds generate higher returns and that too if money is invested for a longer duration.
“Mutual funds are subject to market risk” and that is true. There is always some risk attached while investing in mutual funds.
But, the right asset allocation can help you build a strong Financial portfolio.
You can go in for short term debt funds having an investment horizon of 6 to 18 months that generate regular returns for investors. This way you will bear less risk and yield better Return on Investment(ROI). Thus, Short term mutual funds are ideal for investment tenure of few months.
SIP is usually considered as a good way of investing in mutual funds (preferably if you want to invest for longer period).
Stock investing is basically a long term investment option and requires a lot of patience and knowledge. So, mutual fund is a simpler way to invest your money that gives you access to professionally managed portfolios.
4. Liquid Funds:
These are mutual funds invested in short term government securities and certificate of deposits and have short maturity period of 4-91 days. In simple words, liquid funds can invest only in securities that mature up to 91 days.
Its easy to enter and exit from such liquid funds. They have high liquidity value and thus are are a more secure option for investment tenure of few days. The return on liquid funds ranges from 4%-10% that means they offer moderate returns depending upon your Investment portfolio.
This is a good short term investment option and an alternative to park your money to build an emergency fund. However, some risk is always attached while investing in any type of mutual funds. Based on past data, liquid funds generate higher returns than Fixed deposits.
Also, money lying in a saving bank account will fetch you around 4-6% only. While investing in liquid funds give you fair chances of getting higher returns as compared to a normal savings account.
You can Start a SIP in liquid funds to build an emergency fund equal to 3-6 months of your regular monthly expenses. Whenever need arises, this money can be used to meet your requirements.
5. Fixed Maturity Plans:
You can select Fixed Maturity Small Investment Plans to meet your short term goals. These are debt funds that invest in debt securities like treasury bills, certificate of deposits and government bonds etc.
FMPs invest in debt instruments having same maturity period. e.g. A 2 year FMP shall invest in debt instruments that will also mature in 2 years.
FMPs are close ended funds and are considered less riskier. You tend to get a decent return at the time of maturity. The major drawback is that you cannot withdraw money before the maturity period as compared to Fixed Deposits where you can encash your Fixed Deposit anytime before maturity.
6. Equity Linked Saving scheme(ELSS):
It is a tax saving mutual fund scheme where the minimum lockin period is 3 years. It is considered as a good investment option where the Long term Capital Gains are completely tax free. In simple words, long term capital gains from ELSS are tax exempt and you don’t have to pay any tax on it. Being an equity linked scheme, risk is involved but the earning potential is also very high.
The minimum investment amount is Rs.500 only. ELSS or Equity Linked Saving Scheme is also qualified for tax deduction U/S 80 C upto a maximum of Rs.150000. Also, ELSS has the minimum lockin period as compared to other investments that are eligible for Tax deduction U/s 80C. Due to this investors are inclined towards investing in ELSS.
However, ELSS is considered as a good long term wealth creation tool that helps you grow your money in an effective manner.
7. Arbitrage Funds:
This is a good alternative for conservative investors though many people are not aware about it. Simply stated, in case of an Arbitrage fund, the fund manager buys a stock (shares) in cash and sells the same in future market. The difference between the two is your return on investment.
Here, the profits are earned by exploiting price differences of financial instruments in two different markets. It is a variant of equity mutual fund but are not suited for long term wealth creation. These are basically low risk mutual funds and are best suited for investors having short term investment horizon like 1-3 years.
Short Term Investments in India: A Final Take
Hence, in order to accomplish your short term goals you can select any of these short term investment options. Keeping in mind your financial goals and expected returns, you should be careful while parking your funds for a short term.
You might not get very high returns while putting your money in short term investments or plans. But, you can always yield moderate returns by taking lesser risk and planning wisely.
To get higher returns, you need to diversify your funds and focus on your long term objectives as well. To guide you in your long term investment planning, also go through one of our popular blog posts: 7 Best Long term Investment Options in India
So, what are you waiting for? Get ready and make your best short term investment plans. Do share your valuable thoughts or any additional short term investment ideas that you have. It might be helpful to some potential investors. Feel free to give your valuable feedback in the comment section.