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9 Best Short Term Investment Options

  • Rudri Rawell
  • Feb 24 2022
  • 6 minutes
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Financial planning is often considered synonymous to investing for the long term. However, many financial goals require investments to be made for the short term in order to meet goals with near future timelines. While there is no defined period for short-term investments, the available maturity options can range anywhere from 7 days to 12 months.

There are different investment avenues to choose from if an investor wants to invest for the short term. These may yield either fixed income and market-linked returns. Here, we have put together 9 of the best short-term investment options that investors can explore. 

1. Liquid funds:

Liquid mutual funds or money market funds primarily invest in avenues like: 

  1. government securities, 
  2. corporate bonds
  3. treasury bills, etc.

Most of the securities selected by these funds have maturities of less than 90 days. Therefore, the funds are not exposed to interest rate fluctuations in the medium to long term.

Where do they invest?

Liquid fund returns are dependent on the securities that they select for investment. Some funds may invest only in government securities to ensure that the fund experiences less volatility, while some may invest in short term corporate bonds by accepting slightly higher volatility to fetch better returns. 

Returns

The returns of liquid funds depend on the underlying securities selected by the fund. Investors must look at the historical returns of the types of securities, along with the historical fund returns, to have a better idea on return expectations.

2. Fixed deposits:

Fixed deposits continue to attract many Indian investors who prefer this traditional form of investment. The primary reason why it attracts many investors is that it is safe, can be easily initiated and offers assured returns. With the advent of technology, investors can also opt for online redemptions and easily manage their FD investments. 

Returns

FD returns may vary from 5 to 7% depending on the time period of investment. Interest earnings from these are taxable as per the individual’s income tax slab rate. 

3. Post office term deposits

Post office term deposits are similar to bank fixed deposits. The only difference between the two is the financial institutes that the money is held with. 

Returns and taxation

Post office FD interest rates and tax treatment are also generally similar to bank fixed deposits. 

4. Recurring deposits

While fixed deposit investments require investors to allocate a lump sum amount at once, recurring deposit (RD) allow investors to make small monthly deposits. This provides some level of flexibility to investors for investing money through periodic deposits.

Tenure

A recurring deposit account can be opened at the nearest bank branch, post office, or it can also be done online. RDs generally come with tenures starting at six months up to 10 years. 

Returns

RDs generally offer returns that are similar to fixed deposits, which is approximately 5-6%. The interest earnings from these are taxable as per individual income tax slab.

5. Ultra short-term funds

These are a type of mutual fund that invests in securities with slightly longer maturities as compared to liquid funds. The maturity can range typically between 91 to 500 days. Thus, ultra short-term funds tend to have higher interest rate risks. These funds may charge exit load ranging between 0.1-1% for redemption of units before a specified time period.

Underlying investments and taxation

Just like liquid funds, one of the key aspects to consider in ultra short-term funds is the underlying securities that are included in these funds. Tax applicability is the same as in liquid funds. Therefore, short-term gains are taxable as per standard tax rate.

5. Fixed Maturity Plans

These funds have a pre-defined lock-in period of generally 3 years. Therefore, investors who are sure about the timeline of investment and when they will require the funds back can opt for this investment. These plans do not carry any interest rate risk since they invest in securities whose maturities match the maturity of the fund. 

Taxation

FMPs are more tax efficient as compared to fixed deposits since the funds can grow until the maturity period and these do not attract TDS.

7. Short-term funds

These funds invest in short-term securities with maturities of maximum 3 years. Therefore, they are generally exposed to higher interest rate risks as compared to liquid and ultra short-term funds

8. NSC (National Savings certificate)

Investors who have an investment horizon of 5 years can invest in National Savings certificates. These certificates can be redeemed only after a minimum investment of 5 years. The investment in these is also tax deductible under section 80C.

9. Savings accounts:

While this is not strictly considered as an investment option, savings accounts do offer minimal interest on funds that are parked in these. This investment also ensures that the funds are in super liquid form and available at any time when needed. Interest rates on these can range between 4-6 %. 

Any earnings above Rs. 10,000 from a savings account are taxable under section 80TT. 

Conclusion

Arbitrage funds, money market funds, short-term stock market investments, etc. are some of the other short-term investment options that investors can explore. No matter what form of investment is available, investors must focus on personal financial goals, risk-taking ability, and investment horizon while making the right investment choice.

FAQs

Are stock market investments ideal for short term or long-term investment?

Stock market investments or equity investments can offer positive returns in the long run, especially if the investment decision is based on fundamental analysis. Since stock prices can move vigorously in the short term, it can carry huge risk of losses. Therefore, it is ideal for investors who can remain invested for a longer duration.

How to invest in mutual funds?

To invest in mutual funds, you can download the Finity app on your smartphone. The app allows access to a wide range of mutual fund options. Investors can select one that suits their risk, return, and investment time horizon expectations.

Which is better, FD or debt mutual fund investment?

Debt mutual funds are considered better than FDs, especially for investors looking for higher returns in the short run. Although FDs can offer guaranteed returns, these are often lower than debt fund returns.

Who should invest in liquid funds?

Liquid funds are best suited for investors who have a shorter investment horizon, lower risk appetite, and want stability of returns. These can also be explored by investors who are looking for alternatives to bank FDs.

What features to look for in a short-term investment?

While investing in short-term investments, investors should look for factors such as stability of returns, liquidity, and transaction cost. These factors can determine how much and when an investor can avail returns from the investment.

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