On the basis of tenure, there are two investment types: long-term investments and short-term investments. Consumers with goals like buying a car or a luxury vacation are more likely to invest in the short term.
What are Short-term Investments?
Short-term investment plans are highly liquid investment options wherein the investors can park their corpus for short durations usually ranging from 3 to 12 months or a couple of years. These investments are suitable to serve the basic requirements of a short-term investor such as safety of capital and returns, and quick wealth creation. Some of the most popular short-term investments are debt funds, high-returns savings accounts, term deposits, money market accounts, treasury bills and government bonds.
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8 Best Short-Term Investment Plans for 2020
Here are top 8 short-term investment plans which can help the investors appreciate their wealth this financial year:
|Scheme||Interest Rate (%)||Tenure|
|Debt Funds||Up to 10.50||90 days to 3 years|
|Savings Account||3.5 – 7||–|
|Recurring Deposits||5 – 8||6 months to 10 years|
|Treasury Securities||Average 7.80||91 days to 1 year|
|Bank Fixed Deposits||3.50 – 8.05||7 days to 10 years|
|Large Cap Mutual Funds||8 – 13||3 to 5 years|
|Post Office Time Deposits||5.50 – 6.70||1 to 5 years|
|National Savings Certificate (NSC)||6.8||5 years|
1. Debt Mutual Funds
Debt Funds are a type of mutual funds which primarily invest in debt and money market securities. These funds are the safest among all types of mutual funds and therefore, they are ideal for risk-averse investors seeking good returns over short periods of time.
Debt funds do not exhibit much volatility against the stock market and economic changes. A short-term investment in debt funds tends to provide optimal returns up to 10.5% along with high liquidity and low levels of risk.
There are three major categories of Debt funds on the basis on tenure:
- Liquid Funds– These funds invest in debt and money market securities with maturity up to 91 days.
- Low Duration Funds– Debt Funds with Macaulay duration between 6 to 12 months.
- Ultra Short Duration Funds– Open-ended Debt schemes with Macaulay duration between 3 to 6 months
Capital Gains Tax is levied on Debt Funds depending upon the holding duration of the fund units. If you redeem the units of the fund before 3 years of investment, short term capital gains tax (STCG) is applied as per the tax slab. And, if you redeem the investment including capital gains post 3 years of investment, 20% Long Term Capital Gains Tax is levied, with the benefit of indexation.
2. Large Cap Mutual Funds
According to market capitalisation, Large Cap companies are top 100 companies with a market cap more than or equal to 20,000 crores. The Mutual Funds investing in equity & equity-related securities of Large Cap companies are called Large Cap Funds. These funds are considered excellent for quick investments and smart returns over a period of 3 to 5 years.
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Large-cap funds have the capacity of delivering 8% to 13% returns which is quite good as compared to the returns accrued by other short-term investment options. Moreover, since these companies function as establishments under a proficient business plan and sound financial strength, the chances of any hindrance in the revenue-generation or ending up insolvent are very low. And, the returns are also not largely affected by market fluctuations as compared to other fund categories such as Small cap & Mid Cap Funds.
3. Recurring Deposits
As the name suggests, Recurring deposits allow the investors to make monthly deposits unlike fixed deposits wherein one has to make lump sum investments. Recurring Deposits gives you three significant benefits- Flexibility, Guaranteed Returns and Liquidity. Interest rates on recurring deposit keep on changing from time to time. Investors can earn 5% to 7% interest rates on RD accounts varying from one bank to another.
As a Term-deposit, RDs are considered a low-risk yet profitable investment option by the investors. One can open a recurring deposit for a tenure of minimum of 6 months or up to 10 years. There is a lock-in period of 1 month in RD accounts. In case of premature closure within one month, only principal invested amount is paid to the investor without any interest.
4. Bank Fixed Deposits
Fixed deposits come with tenures ranging from 7 days to 10 years. These are financial instruments offered by the banks and some financial institutions. In contrast to Recurring Deposits, Fixed Deposits are suitable for the investors who have idle corpus and want to park their money in a safe investment option. Fixed Deposit provides a higher rate of interest than a regular savings account.
Besides security of investments and good returns, fixed deposits also offer the subscribers additional features such as a sweep in deposit facility, tax saver FD, loan against fixed deposit and much more.
Fixed deposits can give higher interest returns than savings accounts. Fixed Deposit interest rates vary from 3.5% to 9.20% per annum according to the bank, age of the investor and the tenure that one invests for. The interest earned is added to the income of the subscriber and taxed according to the income slab. In case the interest earned is more than Rs.10,000 in a year, there will be a Tax Deduction at Source (TDS) by the bank.
5. Treasury Securities
Treasury Bills are Government backed securities offering high liquidity and safety of capital with decent returns. Although the returns offered by treasury bills are lower than those accrued by debt funds, they are considered as a good option to park 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 return that you get.
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6. Post-Office Time Deposits
Post-Office Time Deposits (POTD) is a short-term investment scheme formulated by India Post. This scheme is especially very popular in rural and remote areas of India. POTD comes with a tenure of 1 year, 2 years, 3 years and 5 years.
Post Office Time Deposit is quite similar to a Bank FD. Minors above the age of 10 years can also get their accounts opened and invest in this scheme. If you opt for a 5 year Time deposit, you will be able to avail the tax benefits under Section 80C of the IT Act, 1961. The interest rates in this scheme range from 5.50 – 6.70%.
7. National Savings Certificate (NSC)
NSC is a tax-saving short-term investment scheme which can be purchased from any post office. This scheme gives fixed returns. Being a government-backed scheme, it also carries low risk which is why it is usually preferred by risk-averse investors or the ones willing to diversify their investments through fixed return instruments.
Interest rates for National Savings Certificate are subject to periodic changes as per the decisions communicated by the Finance Ministry. The applicable NSC interest rate for Q1 FY 2020-21 (April to June) is 6.8% (for 5 year NSC). If you invest in the 5 year National Savings Certificate, you can also avail tax benefits under Section 80C of the IT Act. However, the interest income will be taxable.
8. Savings Accounts
A savings account is one of the most popular investment options preferred by most of the short term investors. It is a deposit account held at a bank or other financial institution where one can keep extra cash, earn interest on the investment and access it whenever required. It is known for providing maximum liquidity as the subscribers can withdraw the invested amount as and when they want.
The interest rates in Saving Accounts range from 3.5% to 7% varying from one bank to another. There are no limits on the deposit amount. Also, most of the banks provide zero balance Saving Account which implies that you do not have to maintain any minimum balance to keep your account active.
Things to be Considered while Investing
One must consider the following factors while selecting the short-term investment option which aligns with the 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 investments 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 instruments can be less risky than others. For instance, from a 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.
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Benefits of Short-Term Investments
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. These investments offer flexibility to the investors as the curb the need to wait for the security to mature to convert it into cash.
Short-term investment also features limited risk exposure due to shorter maturity periods. They can render substantial returns in a short period of time. Thus, short-term investment options provide an investor with competitive returns, high liquidity and low risk quotient.