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Short Term Investments
Everything You Need to Know

Are you looking for a short-term investment? Maybe you are not sure where to start or what the best options are, or you are wondering how to get the most out of your investment or how to minimise risk.

Let’s dive into what you need to know about short-term investment, from the basics to the more advanced points. From saving for a rainy day to growing your wealth, find out how short-term investments can help you.

Table of Content

What are Short-Term Investments?

First of all, let’s understand what “short-term investments” are and why you want to invest in the short term.

When it comes to investing, there are two main types of strategies: short-term and long-term. A short-term investment is an investment that is expected to be turned over in a few years or less. Anything more than 5 years can’t be considered a short-term investment.

They are the assets 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.

This type of investment is typically seen as less risky than a long-term investment, which is an investment that is not expected to be turned over for several years. On the contrary, in short-term investments, you get easy excess to your money sooner by completing limited formalities.

So why do you need a short-term investment in your investment portfolio? You may need these kinds of investments to fulfil several short-term goals. For example:

  • To develop the habit of saving – If you are starting in your career, you would want to develop a habit of keeping some of your income aside as savings.
  • To save for a down payment on a house or vehicle.
  • To save for a yearly vacation.
  • To avoid the market risk of long-term investment.
  • To save for buying an expensive piece of jewellery or gadget.

How Does Short-term Investment Work?

Short-term investments work for you as a medium to keep your hard-earned money safe, easily accessible, and earn some interest. This differs from long-term investment, which is all about stability and growth. So the main benefit of investing in short-term is liquidity.

Although the risk involved in short-term investments depends upon your choice of investment, they are usually less risky.

The returns you get on such investments are also generally not as significant as compared to long-term investments. For example, if you buy mutual funds for a short duration, you will earn much less than someone who keeps these assets for years before selling.

Similarly, other short-term investment options, such as recurring deposits, don’t yield much interest. Thus, you can’t count upon short-term investment for significant income. But that is a reasonable cost to pay against the safety and accessibility you get with these investments.

List of Top 10 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. The top 10 available prospects in India are:

1. Savings Account

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Savings Account

Until you get hold of the more complicated investment options, a savings account is a safe place to park your money temporarily. It's a bank account that allows you to earn interest on your money.

There are 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.

It's the safest option to preserve your capital and earn decent returns with interest. Isn't it a win-win! 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. With Freo Save, you can earn high interest rates. Freo Save digital savings account offers up to 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.

Takeaway: Open a savings account if you want accessibility, safety, & reasonably Good Interest Rate!

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2. Short-Term Mutual Funds

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Mutual Funds for Arbitrage

Arbitrage is the simultaneous buying and selling of an asset in different markets to take advantage of price discrepancies. Thus arbitrage mutual funds work by taking advantage of price discrepancies in different markets. By buying low in one market and selling high in another, these funds can earn a profit while mitigating risk.

For example, if you buy a stock for $10 in one market and sell it for $11 in another, you would earn a profit through arbitrage.

Mutual funds focusing on arbitrage seek to take advantage of these price discrepancies across different markets.

Takeaway: Invest in mutual funds for arbitrage if you prefer quick results and calculated risks!

3. Recurring Deposits (RD)

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Recurring Deposits (RD)

Recurring deposits allow you to make regular deposits to your account, usually at the same time every month or quarter. These are different from the traditional savings account, where you deposit cash at any time, and then it is available for withdrawal at any time.

The interest rates offered by recurring deposits range from 3.50% to 6.25%. You can specify when your money will be paid out with recurring deposits. 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.

Also, your funds are automatically transferred into your RD account from your savings account each month without any additional effort (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!

Takeaway: Choose recurring deposits for convenience, good interest rates, and the safety of your money!

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. But the interest rates you can earn under this scheme are better than fixed deposits or savings accounts.

Moreover, you can use corporate deposits to pay expenses, such as taxes or rent, without withdrawing cash from your account. They can also be used as collateral for loans, which can help you get better terms on loans.

Takeaway: By investing in corporate deposits, you get higher interest rates & a multifunctional financial tool.

5. Treasury Securities

5

Treasury Securities

Treasury security is a bond issued by India's government, 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. They 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 maturity. Interest rates for these treasury securities are between 3 to 8%.

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 a lower risk than stocks since their value is not based on any single company's performance.

Takeaway: Get the treasury security bond to have Govt. authorised secured bonds with higher interest rates & the freedom to use them for either short-term or long-term investments.

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 - An investment option offered to both borrowers and lenders.

Peer-to-peer lending is a popular term that refers to the process of lending money directly between two individuals. No middlemen are involved in the process, meaning every time you lend someone money, the interest 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. The interest rates on these loans vary depending on the lender and borrower, but they usually range from 4%-7% per year.

You can use P2P lending to buy a home or car, pay credit card bills, repay student loans, or invest in stocks and mutual funds. Fewer fees are involved, as no banks are involved in the process. All transactions occur directly between lenders and borrowers.

Takeaway: Peer-to-peer is your kind of investment if you believe in direct dealing, easy processes, and saving for a short-term financial goal.

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 time. Banks and other financial institutions usually provide this facility. The interest rate offered on these deposits varies from bank to bank, but they may be fixed or floating.

Floating rate deposits pay interest according to the prevailing market rates at the time of maturity. Fixed-rate deposits pay interest based on a pre-fixed rate, generally for a few years.

Fixed deposits are attractive because they give you peace of mind that your funds will be available when needed. As long as the inflation 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.

Takeaway: Fixed deposits are ideal for saving for a particular duration in a single transaction.

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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 introduced in India for the benefit of savings depositors. You can invest in NSC to earn higher returns in India 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.

Apart from being tax-free, it's a safe and secure way to invest your money. When you invest in an NSC, you are guaranteed to get your investment back plus interest. NSCs are a flexible investment. You can cash in your NSC at any time without penalty. This makes them an excellent option for people who need access to their money quickly.

Takeaway: Get an NSC if your goal is to save taxes, make a low-risk investment, and get quick redemption.

9. Post Office Time Deposits

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Post Office Time Deposits

A post office time deposit is a savings account that offers you a higher interest rate than a regular savings account. The money in the account is still accessible, but you cannot withdraw it for a set period. This can be anywhere from six months to five years.

The advantage of a post office time deposit is that you earn more interest on your money. This can help you reach your financial goals more quickly. If you want a safe place to invest your money and grow it over time, then a post office time deposit may be suitable for you.

Talk to your local post office or financial institution to learn more about this type of account and how it can benefit you.

Takeaway: Park your money in post office time deposits for higher interest rates and safety.

10. Liquidbees ETF

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Liquidbees ETF

A liquid exchange traded scheme, popularly known as liquid bees, is an investment vehicle that allows investors to trade in a basket of securities in a single transaction. The scheme enables investors to take advantage of the liquidity of the underlying securities while also providing them with the flexibility to choose the mix of securities they wish to trade in.

The scheme was first launched in India in 2007 and has since become one of the most popular investment vehicles in the country. Liquid bees are particularly popular with retail investors. This is because they are low in cost compared to other investment products in India.

Liquidbees ETFs offer diversification across sectors and companies, which reduces risk and helps generate higher returns. Moreover, they are super convenient, as they can be bought and sold just like any other stock exchange stock.

Takeaway: Liquidbees ETF is well-known for its flexibility, easy redemption, and calculated risk.

Advantages and Disadvantages of Short-Term Investments

Advantages

Short-term investments are generally purchased with very little initial investment, making them cost-effective.

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

With short-term investments, there is no risk of losing all your money due to stock market crashes.

Disadvantages

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

Short-term investments offer you a limited chance. This is because you invest for a limited time. And also because most of them are low-risk investments.

Short Term Investments
vs.
Long Term Investments

Long-term investments are totally different from short-term investments in terms of return, tenure, and risk factors.

Long-term investments demand commitment and patience from you for years to see ROI. Short-term investments give you quick returns to fulfil your short-term goal.

There is no patience required to invest in the short term as the returns are almost guaranteed, and the investment time is less. However, the returns on short-term investments are not as significant as on long-term investments. Therefore it’s a common practice to invest the funds collected through short-term investment in long-term investments to build wealth.

Long-term investments include gold, real estate, stocks, etc. And the short-term investments are the accounts and deposits mentioned in this post.

FAQs

Where can I invest for six months?

For six months, you can invest in fixed, recurring, debt, and commodities mutual funds. To select from these options, you can analyse your risk profile and seek advice from a registered investment advisor.

What are the best short-term investments in 2022?

Some of the best short-term investment options in 2022 are a savings account with Freo Save, RD, bank FD, post office time deposit, and corporate deposit.

Are all of the short-term investment plans listed above tax-free?

According to Section 80C of the Income Tax Act, you can have a tax break of up to the investment of 1.5 Lakh.

Investing your money in short-term investments can be a great way to secure your financial future and earn some quick profits. However, it’s important to remember that not all investments are created equal. Thus, always research before investing money, and diversify your portfolio to minimise risk.

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