Achieving your financial goals requires a combination of short- and long-term investments. Short-term investments are crucial in providing liquidity and funding immediate financial needs. If you want a substantial return within one year, these investment options can help you achieve your financial objectives. But what exactly is a short-term investment plan?
What Is a Short-Term Investment Plan?
Short-term investments, also known as marketable securities or temporary investments, are financial investments that can easily be converted to cash, typically within five years. Many short-term investments are sold or converted to cash after only three-12 months.
Short-term investments may also refer specifically to financial assets—of a similar kind, but with a few additional requirements—that a company owns. Recorded in a separate account, and listed in the current assets section of the corporate balance sheet, short-term investments in this context are investments that a company has made that are expected to be converted into cash within one year.
Some common examples of short-term investments include CDs, money market accounts, high-yield savings accounts, government bonds, and Treasury bills. Usually, these investments are high-quality and highly liquid assets or investment vehicles.
Now, let’s explore some of the top short-term investment options offering attractive returns within a year.
Exploring The Best Short-Term Investment Plan
Fixed Deposits (FDs)
Fixed deposits are one of the most popular short-term investment choices. They provide a safe and secure way to park your money while offering competitive interest rates. Most banks and financial institutions offer FDs with varying tenures, typically seven days to 10 years. To maximise returns in a year, opt for shorter terms, such as six to 12 months, as they offer higher interest rates than longer-term deposits. FDs are also an ideal option for risk-averse investors.
Recurring Deposits (RDs)
Recurring deposits are another excellent short-term investment option, especially for individuals who want to invest smaller amounts of money regularly. Similar to FDs, RDs offer a fixed interest rate for a specific tenure, which can be as short as six months or one year. The interest is compounded quarterly, allowing you to earn a decent return within a year. RDs are a great way to cultivate a savings habit while earning a reasonable interest rate.
Arbitrage funds are a type of equity mutual fund that aims to exploit price differences in the cash and futures markets. These funds are considered low-risk and tax-efficient. Although they are categorised as equity funds for tax purposes, they typically provide relatively stable returns in the short term, making them a viable option for one-year investments.
“For a time horizon of one year, arbitrage funds can give tax-efficient returns of over five per cent. They use equity in base, so equity taxation applies on them, which can be useful for investors in high tax brackets,” says an expert.
Short-Term Debt Funds
Short-term debt funds are mutual funds that primarily invest in fixed-income securities with shorter maturities, such as government bonds, corporate bonds, and commercial paper. These funds are relatively less volatile than equity funds and provide a stable return. Investing in short-term debt funds for one year can yield attractive returns, often higher than traditional fixed deposits.
Liquid Mutual Funds
Liquid mutual funds are ideal for those who seek higher returns than traditional bank savings accounts while maintaining liquidity. These funds primarily invest in money market instruments and short-term debt securities, making them suitable for short-term investments.
Liquid funds typically offer higher returns than savings accounts and come with no lock-in period, which means you can redeem your investment anytime without incurring any exit load.
“If one has an appetite for it, then they can also explore liquid funds as the interest rate cycle might peak soon and allow making a decent return on account of that,” says an expert.
Corporate Fixed Deposits
Non-banking financial companies (NBFCs) and corporations offer corporate fixed deposits. While they often offer higher interest rates than traditional bank FDs, they come with a slightly higher level of risk. Before investing in corporate FDs, it’s essential to research the company’s creditworthiness and financial stability. Opt for reputed companies with a good track record.
But have you wondered how short-term investment works? Let’s see.
How Short-Term Investments Work
The goal of a short-term investment—for both companies and individual or institutional investors—is to protect capital while also generating a return similar to a Treasury bill index fund or another similar benchmark.
Companies in a strong cash position will have a short-term investment account on their balance sheet. As a result, the company can afford to invest excess cash in stocks, bonds, or cash equivalents to earn higher interest than what would be earned from a normal savings account.
There are two basic requirements for a company to classify an investment as short-term.
- First, it must be liquid, like a stock listed on a major exchange that trades frequently or U.S. Treasury bonds.
- Second, the management must intend to sell the security within a relatively short period, such as 12 months. Marketable debt securities, aka “short-term paper,” that mature within a year or less, such as U.S. Treasury bills and commercial paper, also count as short-term investments.
Marketable equity securities include investments in common and preferred stock. Marketable debt securities can include corporate bonds—that is, bonds issued by another company—but they also need short maturity dates and should be actively traded to be considered liquid.
Now, before concluding let’s see what are the advantages and disadvantages of this type of investment.
Advantages and Disadvantages of Short-Term Investments
Short-term investments help ground an investor’s portfolio. Although they typically offer lower rates of return compared to investing in an index fund over time, they are highly liquid investments that give investors the flexibility of making money they can withdraw quickly if needed.
For a business, long-term investments are only counted as income once they are sold. This means that companies that decide to hold or invest in short-term investments count any fluctuations in price at the market rate. This means short-term investments that decline in value are marked down as a loss for the company on the income statement.
Short-term investment gains are reflected directly on the income statement.
Short-term investments take on lower risk, making them stable options.
Short-term investments help diversify income types, in case of market volatility.
Short-term investments typically have lower rates of return.
Any decline in the value of a short-term investment will directly affect the net income of a business.
FAQ: Which Is The Best Short-Term Investment Plan
Which is the best strategy to invest in the short term?
Short-term investments like Treasury bills, high-yield savings accounts, short-dated CDs, money market accounts, and government bonds offer some of the best interest rates or rates of return over holding periods of less than three years.
Which analysis is best for short-term investment?
Fundamental analysis is most often used when determining the quality of long-term investments in a wide array of securities and markets, while technical analysis is used more in the review of short-term investment decisions such as the active trading of stocks.
What are two good short-term investments?
Bank products and Treasurys are safest, corporate bond funds slightly less so. CDs and bonds are relatively low risk compared to stocks, which can fluctuate a lot and are high risk.
Which investment gives the highest return?
Treasury Bills. The Government of India issues Treasury Bills to raise funds for up to 365 days. It is considered an investment with the best returns. Since the government gives these, they are considered very safe.
Short-term investments can be great investments for individual investors and corporations who are looking for both liquid and stable options to grow their wealth. The options are plenty: from CDs to bonds and high-yield savings accounts, it’s only up to each investor to do their homework.
Founder of Sustvest
Hardik completed his B.Tech from BITS Pilani. Keeping the current global scenario, the growth of renewable energy in mind, and people looking for investment opportunities in mind he founded SustVest ( formerly, Solar Grid X ) in 2018. This venture led him to achieve the ‘Emerging Fintech Talent of the Year in MENA region ‘ in October 2019.