Investments can be broadly divided into 2 key categories based on tenure – short term Investment plan and long-term investments. While investments with a tenure of up to 1 year fall under the short-term category, long-term investments are typically the ones with at least 3-5 years of time horizon.
Benefits of Short Term Investment Plan
Short-term investments provide optimal returns and liquidity in a relatively shorter span of time which can range from a few months to a year. These options are more focused at meeting the financial objectives in the near future.
Short-term investment also feature limited risk exposure due to shorter maturity periods. Thus, short-term investment options provide an investor with competitive returns, high liquidity and low risk quotient.
Best Short-Term Investment Options 2019:
The following are some of the most popular short-term investment options which can help investors appreciate their wealth in 2019:
- Debt Funds: A debt fund is a type of mutual fund which primarily invests in debt and money market securities. Debt funds are the safest among all types of mutual funds and are therefore ideal for risk averse investors seeking good returns over short periods of time. Debt funds are also a safe investment as they do not exhibit much volatility against stock market and economic changes. A short-term investment in debt funds tends to provide optimal returns along with high liquidity and low levels of risk.
- Treasury Securities: Since treasury bills are backed by the government, they are another good option for short-term investment capable of offering high liquidity and safety of capital with decent returns. Though returns offered by treasury bills are lower than those provided by debt funds, they are a good option as buying them is like parking your assets in a safe haven. The maturity period of T-bills can go up to 1 year and the rule of thumb states that the shorter the maturity period, lower the interest rate that you get.
- Equity Derivatives: Equity derivatives are a good short-term investment option for investors possessing good stock market knowledge. However, investors need to have a high-risk appetite for such investments as a direct equity investment can be highly volatile in terms of price movement. These investments are made with a short-term perspective as many of these derivative investments feature expiry (maturity) of up to 3 months.
Also Read : What are liquid funds?
- Investments in Precious Metals: Precious metals such as gold and silver are often highly sought after investments as they can act as a hedge against financial insecurity in both the short and long term. Historically, the price of precious metals has held its value in the short term and moved upwards in the long term. This makes metals a secure and potentially low-risk short term investment. These investments tend to be relatively more liquid in nature in comparison to other short-term investment options.
- Fixed Maturity Plans: Fixed Maturity Plans (FMPs) are closed-ended debt funds. FMPs are limited term investments which come with a definite maturity date. Though returns from such investments are not guaranteed, many investors seek out these investments in case they are looking for a lump sum investment solution.
- NCDs, Corporate FDs or Bank Deposits: Non-Convertible Debentures (NCDs), corporate fixed deposits (FDs) and bank fixed deposits (FDs) can be used by investors as short-term investments. However, it is important to note that returns from these investments tend to be higher in case of longer investment tenures. The risk of these investments is marginal which makes them a popular investment option among risk averse investors.
Factors to Consider While Selecting Short-Term Investment Option
One must consider the following factors while selecting the short-term investment option which best suits one’s returns expectation, risk appetite and liquidity requirement:
- Liquidity: A key advantage of short-term investments is high liquidity i.e. the ease of converting them into cash with minimal loss in value. For instance, treasury bills are highly liquid as they can be traded at their fair market value during periods when the bond market is operational. One must consider how liquid is the short-term investment in which one intends to invest.
- Risk: All of the short-term investment carry a relatively lower risk component as compared to their long-term counterparts due to the short maturity period. Said that, within the category of low-risk short-term investment options, some short-term investment instrument can be less risky than others. For instance, from returns perspective, T-bills are safer than debt funds.
- Tax Efficiency: Gains from short-term investments are taxable as per the Short-Term Capital Gains Tax (STCG). However, the rate at which STCG is levied may vary from product to product. Therefore, tax efficiency of the investment option is another key factor which one should consider while picking up the right short-term investment option for himself/herself.