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Short Term Investments
Everything You Need to Know

When it comes to investing, a lot of people prefer long-term investments. While this makes sense, short-term investments are for you if you want to invest your money quickly and sometimes even earn more money.
Everyone wants to earn higher returns in their investment portfolios. Short-term investments are one such way to accomplish this. There are a lot of benefits associated with short-term investments as well. Short-term investments can be made for various purposes, ranging from making small payments on past due credit cards to buying stocks and bonds for retirement plans. In this article, we will look at what are short-term investments, how does one make use of them, and how do they work?

Table of Content

What are Short-Term Investments?

Short-term investments are a type of investment that usually lasts for a period of less than one year. These investments can be made in stocks, bonds, commodities, or currencies. The main difference compared to long-term investments is the length of time they will be held. These investments are usually made to earn a higher return than what can be obtained from other types of investments.

Short-term investments are characterized by their volatility, which is measured by the standard deviation of returns or risk. The higher the volatility, the more likely it is that you will lose money on your investment before you make any return on your investment. Therefore, you must make the right choice and calculate the risk-reward ratio before going forward with a short-term investment.

How Does Short-term Investment Work?

A short-term investment is an asset that you can quickly sell to use the money for another purpose. The main goal of a short-term investment for both corporates and individuals is to save their capital while generating returns on the same.

Short-term investments can earn more interest than other types of investments because they’re bought and sold quickly in large amounts by many investors. The fact that they’re liquid also means they don’t require as much paperwork or documentation as long-term investments do.

These investments can also help you to achieve your short-term goals, which can include buying jewelry, traveling to a new place, or buying a new vehicle or a gadget. Therefore, instead of holding cash, it’s better that you start investing some money to get decent returns.

List of Short-Term Investment Options in India

When it comes to investing for the short term, investors can find multiple options where they can invest their money. Some of them are:

1. Savings Account

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Savings Account

Saving money is important. It helps you build financial security, makes you feel confident, and helps you plan for the future. But saving money can be tricky if you don't know where to start.

A savings account is a special type of bank account that allows you to earn interest on your money. There are several different types of savings accounts, but they all have one thing in common: You deposit your cash into them and then earn interest on it until you take it out again. Many individuals prefer to go with a savings account since it's the safest option to preserve their capital and allows them to earn decent returns with interests. The interest rates for savings accounts vary since they depend on the institution.

Usually, the interest rates range from 3.5% to 7%* per annum. Therefore, when you want to earn the highest interest rates, it is recommended that you go with Freo Save Digital Savings account since it offers an impressive 7%* interest rate on a savings account. In addition, you also get the comfort of 100% digital banking, allowing you to access all the major banking features from the comfort of your home.

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2. Short-Term Mutual Funds

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Short-Term Mutual Funds

Mutual Funds are investments that are pooled together by a group of investors. An appointed committee does the management of these funds, and the collection of the money is done by an intermediary, like a bank. Mutual funds have several advantages over individual stocks or bonds. They offer diversification, which means that you can buy shares in several different mutual funds instead of just one or two.

Short-term mutual funds are designed to provide more relevant asset appreciation and income than traditional funds. The main difference in short-term mutual funds is their investment horizon. Short-term funds typically invest in securities that mature within one year, two years, or three years from the date of purchase. The longer the maturity period, the more volatile these funds tend to be. These mutual funds usually offer interest rates between 5% to 8%.

3. Recurring Deposits (RD)

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Recurring Deposits (RD)

Recurring deposits are deposit arrangements that allow you to make regular deposits to your account, usually at the same time every month or quarter. It's a type of investment that gives you access to your money for a set period of time. These are different from the traditional savings account, where you deposit cash at a specific time, and then it is available for withdrawal at any time. The interest rates offered by Recurring Deposits range from 3.50 percent to 6.25 percent. You can specify when your money will be paid out with recurring deposits.

Recurring deposits come with some advantages over other types of accounts:

1. You don’t have to worry about losing your money if you miss a scheduled withdrawal date because it’s locked away until the following month rolls around.

2. Your funds will automatically be transferred into your bank account each month without any additional effort on your part (unless you choose to do so). This means no more worrying about forgetting to add money to your account or missing a monthly transfer deadline!

3. Most banks will offer recurring deposits with interest rates up to 1% per year — higher than many accounts but lower than what’s available with fixed-term investments like bonds or CDs.

4. Corporate Deposits

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Corporate Deposits

Corporate deposits are one of the most popular investment products for individuals and businesses. The concept for these is similar to fixed deposits. The interest rates which you can earn under this scheme are better than fixed deposits. Non-bank financial institutions usually offer Corporate Deposits, which means that you can't get them from a bank.

5. Treasury Securities

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Treasury Securities

A Treasury security is a bond issued by the government of India, which is backed by its full faith and credit. These bonds are also known as Government securities, Government bills, or Issue bonds.

These bonds offer a fixed interest rate for a specified period of time and are called floating rate bonds when the interest rate on them changes from time to time. The bond's maturity date can be between 3 months and 30 years. Interest is paid only when the bond matures and at the date of maturity. Interest rates for these Treasury securities are also between 3 to 8 percent.

Treasury securities have several advantages over other types of investments, such as bank deposits and fixed deposits: they are easy to understand because they carry a fixed yield or return; they are attractive because they offer a higher rate of return than other investment options; they have lower risk than stocks, since their value is not based on any single company's performance; and, lastly, you can buy treasury securities from banks or financial institutions through your broker/dealer or directly from the issuer itself.

6. Peer-to-Peer Lending

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Peer-to-Peer Lending

Peer-to-peer lending is a new way of making money that has recently become popular. It is also known as P2P lending, and it's an investment option offered to both borrowers and lenders. Here are some of the things you need to know about peer-to-peer lending:

Peer-to-peer lending is a popular term that refers to the process of lending money directly between two individuals. There are no middlemen involved in the process, which means that every time you lend someone money, the interest which you earn remains yours.

Peer-to-peer loans are typically made via an online platform where investors can browse through different lenders and choose to whom they want to lend money to. The interest rates on these loans vary depending on the lender and borrower, but they usually range from 4%-7% per year.

The most common uses for peer-to-peer lending include:

1. Buying a home or car

2. Making payments on credit cards or student loans

3. Investing in stocks and mutual funds

4. In addition to being able to choose which loan you want, investors have several

other advantages over traditional banks when it comes to peer-to-peer lending:

  • There are fewer fees involved, as no banks are involved in the process; all transactions occur directly between lenders and borrowers.
  • Since no middlemen are involved, it’s much easier for investors to compare different prices and terms offered by other lenders.

7. Bank Fixed Deposits

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Bank Fixed Deposits

A fixed deposit is an instrument in which you deposit a specific amount of money for a fixed period of time. Banks and other financial institutions usually provide the facility. The interest rate offered on these deposits varies from bank to bank, but they may be fixed or floating. Floating rate deposits are those that pay interest according to the prevailing market rates at the time of maturity. Fixed-rate deposits are those that pay interest based on a pre-fixed rate, generally for one year or less; however, some banks also offer short-term fixed deposits with maturities shorter than one year.

Fixed deposits are attractive because they require no additional effort on your part and provide you with peace of mind that your funds will be available when required. As long as the inflation rate and interest rates remain stable, these deposits can be very profitable investments for every investor who plans to hold them for one year or longer.

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8. National Savings Certificate

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National Savings Certificate

National Savings Certificate (NSC) is a tax-free investment scheme that has been introduced in India for the benefit of savings depositors. In India, you can invest in National Savings Certificate (NSC) in order to earn higher returns than other short-term investments. The scheme currently offers you a return of 6.8% per annum. It has a maturity period ranging from 3 to 5 years. To qualify for NSC, you must be above 18 years of age and a resident Indian citizen.

9. Stock Market Investment

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Stock Market Investment

Investing in the stock market for the short term is a pretty good way to make money. But before you invest, you need to know what kind of stock market investment you want to do. You must decide if you wish to invest in individual stocks, mutual funds, or ETFs. You need to decide if you will invest in small-cap or large-cap stocks.

If you're new to investing, then it's best if you start off with short-term investments and work your way up as your experience grows. This will help you avoid making mistakes that can cost you a lot of money over time.

Before investing in stocks, there are some things that you need to do:

1. Research the company's performance over the past few years and find out whether they have made profits or losses. You can check their annual report if it's publicly available online or ask your broker for more information about their performance.

2. If the company has done well in their business, then it will be safer to invest in them as compared to other companies that might have seen losses in their business due to factors like recession, etc.

3. Check whether the stock price of that particular company has gone up or down during the last few months or years (if they have been trading for long). This will give an idea about how much value they hold at present and how much it could go up or down within the next couple of months or years.

10. Post Office Time Deposits

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Post Office Time Deposits

It is a lesser-known fact that the post office does not just offer banking services to its customers, but also provides them with a range of other services as well. One such service is the facility of time deposits. The idea behind this facility is to provide an opportunity for people to make small investments in a short period of time and enjoy higher returns on these investments in the future.

The interest rates for the post office time deposits range from 5.5% to 6.7%. Deposits under this scheme can have a tenure of 1,2,3, or 5 years and an investor needs to deposit a minimum of Rs.200 to get started with the scheme.

Advantages and Disadvantages of Short-Term Investments

Advantages

Short-term investments are generally purchased with very little initial investment, making them cost-effective. As a result, you can make more money than if you had invested in stocks with higher initial costs.

A short-term investment is easy to liquidate because it can be sold quickly and easily. This means you can buy or sell it whenever you want without incurring any transaction costs or commissions.

With short-term investments, there is no risk of losing all your money due to market volatility or stock market crashes because these securities do not involve stocks or other equity investments like stocks or bonds that carry higher risk levels than fixed income instruments such as Treasury bills and bonds

Disadvantages

Short-term investments carry a higher risk than longer-term investments, so they should be used only by investors who can afford to lose their principal. It’s important to remember that short-term investments have lower yields than long-term ones because there is less demand for them on the market.

Short-term investments also come with higher fees and commissions. These costs can eat away at your earnings over time, especially if you’re paying high minimum balances or frequent trading fees.

Short Term Investments
vs.
Long Term Investments

Short-term

Short-term investments are usually used to make quick profits and ride out a market correction. These investments can be made for a few days, weeks, or even months. These types of investments are usually considered risky and are not recommended for the average investor.

Long-term

A long-term investment is one that you hope will last for years or even decades. Long-term investments often take years to pay off and may have a lower return than short-term investments. The best way to determine if an investment is long-term is to look at the time span involved in investing and compare it with how long you expect your investment to last.
The main difference between short and long-term investments is that short-term investments are usually made in a shorter period of time. Longer-term investment instruments include stocks, bonds, real estate, and gold. Short-term investments include certificates of deposit (CDs), savings accounts, money market mutual funds, and other more conservative investment products.
STIs can be an excellent source of both income and wealth building. Whether you have a whole bunch of money to invest or just a little bit, we’d encourage you to put it into the market. It may be scary but oh how the returns can be sweet.
Consider your particular situation, keeping in mind the risks and rewards associated with this unique class of investments. And if you have any questions, definitely speak with a professional financier before making any good financial decision.
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