Best Short-Term Investment Plans

What is Short-Term Investment?

Short-term investments plans involve allocating funds to financial instruments with brief maturity periods, typically ranging from a few months to 5-10 years. The primary goal is to preserve capital while earning modest returns. These investments provide quick access to funds for emergencies or short-term needs, offering flexibility to park surplus funds without long-term commitment. They are ideal for meeting immediate financial goals, building emergency savings, or funding short-term expenses.

Popular short term investment options include treasury securities, Fixed Deposits, short-term bonds, and money market funds. For Non-Resident Indians (NRIs), tailored investment plans may address currency fluctuations and repatriation needs. Select short-term investments based on your risk tolerance, liquidity needs, and financial goals. Diversifying your portfolio with various short-term options can optimize returns. Tools like a ULIP calculator may assist in planning more diverse investments, such as investing in the capital guarantee solution plan by Kotak Life Insurance or any one-time investment plans, such as a ₹1 Crore investment plan.

Best Short-Term Investment Options in India

These are the best short term investment plans that can be opted for by beginners who want to experience how short-term investments work. Let us take a look at some short-term investment options:

Savings Account

A savings account is one of the safest and most accessible short-term investment options for a one-month period. These funds can be withdrawn without penalty, making it ideal for immediate access. Deposits are usually insured by government agencies, ensuring the safety of your principal. The main focus of a savings account is liquidity, not substantial returns. Banks generally offer interest rates between 4% and 7%, making it a safe but low-yield option for growing your savings.

Liquid Funds

Liquid funds, a mutual fund, are designed to provide higher returns than a savings account while maintaining high liquidity. These funds invest in short-term money market instruments, allowing you to redeem your investments quickly, usually within a day.

Investors can expect post-tax returns of approximately 4%–7% on liquid funds. These funds are suitable for parking money for one day to 90 days or more. Investors can choose between dividend and growth options. Dividends are taxed at around 30%, while capital gains are added to income and taxed at the investor’s marginal tax rate.

Recurring Deposits

Recurring Deposits allow you to invest a fixed amount regularly for a short tenure, earning a fixed interest rate. They offer capital safety and predictable returns, making them suitable for conservative investors. You can opt for either a Postal RD or a Bank RD, with banks typically offering RD terms ranging from a minimum of 6 months to a maximum of 10 years. The interest earned on RDs is subject to taxation.

Bank Fixed Deposits

Bank Fixed Deposits provide a safe investment option with a fixed interest rate, ensuring capital preservation. They offer higher returns compared to savings accounts with low risk. Banks provide Fixed Deposits with terms starting from as short as 7 days. Investors seeking to place funds in savings schemes for even just a week can select a Fixed Deposit with a corresponding tenure.

Treasury Securities

Short-term Treasury securities, such as Treasury bills, are government-backed and mature in three months. They offer high liquidity and minimal risk, making them ideal for risk-averse investors seeking secure returns.

Three-month T-bills typically mature in 91 days. However, T-bills are also available in other maturities, such as 4 weeks (28 days), 6 weeks (42 days), 8 weeks (56 days), 13 weeks (91 days), 17 weeks (119 days), 26 weeks (182 days), and 52 weeks (364 days).

Money Market Account

Money Market Funds are debt funds that provide loans to companies for up to one year, structured to enable fund managers to achieve higher returns while managing risk through flexible lending periods. Longer loan terms typically yield higher returns.

Advantages of Money Market Funds include:

• Suitable for investment periods of at least 3–6 months
• Minimal risk of loss for investments held over 6 months
• Generally offer better returns than Bank Fixed Deposits of comparable duration

Stock Market/Derivatives

Investing in stocks or derivatives for three months can offer high returns but comes with significant risk and volatility. Stocks do not offer fixed interest but provide returns through price appreciation and dividends, historically averaging ~10% annually before inflation, though returns vary widely yearly. Derivatives, like interest rate futures or options, don’t yield interest; their value depends on underlying assets (e.g., interest rates), with potential for high gains or losses based on market movements. This option suits experienced investors willing to take on short-term market fluctuations.

Investments in NCDs/ Corporate or Company Deposits

Non-Convertible Debentures (NCDs) and corporate deposits from reputable companies provide higher interest rates than traditional savings instruments. They carry more risk but can offer attractive returns for a six-month investment period, suitable for investors comfortable with moderate risk.

Corporate deposits offer higher returns compared to Fixed Deposits (FDs) or debt Mutual Funds, but come with increased risk. Provided by Non-Banking Financial Companies (NBFCs) and other financial institutions, they require investors to commit funds for a fixed term while earning a predetermined interest rate. The investment duration can vary from a few months to several years.

Short Term Funds (New Sub header)

Short-term mutual funds, also known as low-duration or short-duration funds, invest in debt and money market securities like treasury bills and corporate bonds with 1–3 year maturities, yielding 6%–9% annually based on market conditions. Ideal for 91 days to 3-year horizons, they have no fixed lock-in but may charge exit loads for early withdrawals. Returns are taxed at the investor’s slab rate if held under 3 years; long-term gains (over 3 years) are taxed at 20% with indexation for pre-April 2023 investments, else at slab rates.

National Savings Certificate (New Sub header

The National Savings Certificate (NSC) is a government-backed, fixed-income savings scheme offered by India Post, designed for secure, guaranteed returns. It currently offers an interest rate of 7.7% per annum (as of 2023, compounded annually but paid at maturity), suitable for risk-averse investors.

The investment requires a fixed tenure of 5 years (1,825 days), with no option for early withdrawal except in specific cases like the investor’s death. The minimum investment is ₹1,000, with no upper limit, and returns are taxable, added to the investor’s income, and taxed at their slab rate.

Equity Mutual Funds (New Subheader)

Equity Mutual Funds invest mainly in stocks, offering 9%–12% average annual returns (up to 17.67% in H1 2024), but with high volatility, suiting risk-tolerant investors. No fixed tenure, but a 3–5 year horizon (1,095–1,825 days) is advised to manage market fluctuations. Returns from capital gains and dividends are taxed at 20% for short-term (<1 year) and 12.5% for long-term (>1 year) gains above ₹1.25 lakh annually. Ideal for long-term wealth creation, they carry market risk.

Fixed Maturity Plans (New Subheader)

Fixed Maturity Plans (FMPs) are close-ended debt Mutual Funds investing in bonds and money market instruments, with tenures of 1–5 years (365–1,825 days), yielding 6%–8% annually. Investors must stay invested until maturity due to limited liquidity, with premature exit only via secondary markets, if available. Returns are taxed as short-term capital gains (<3 years) at slab rates and long-term gains (>3 years) at 20% with indexation for pre-April 2023 investments, else at slab rates.

How Do Short-Term Investment Plans Work?

Short-term investment options are designed to generate returns within a short period, typically less than three years. These plans prioritize liquidity and capital preservation, making them suitable for investors looking to meet near-term financial goals or manage cash reserves. They often include instruments like money market funds, short-term bonds, Treasury bills, and CDs.

The returns on these investments tend to be lower than long-term options but offer higher stability and lower risk. Investors can access their funds relatively quickly, making these plans ideal for those needing quick access to their money without significant penalties or losses.

Features of the Short-Term Investment Options

Short-term investments provide easy access to funds, allowing investors to withdraw their money with minimal delay. This is ideal for meeting urgent financial needs or unexpected expenses. Here are some of the features of short-term investment plans with high returns:

Liquidity

Short-term investments provide easy access to funds, allowing investors to withdraw their money with minimal delay. This is ideal for meeting urgent financial needs or unexpected expenses.

Safety

Although the returns are lower than long-term investment plans, they are relatively stable and predictable. This makes it easier for investors to plan their finances and achieve their short-term goals.

Stable Returns

Although the returns are lower than long-term investments, they are relatively stable and predictable. This makes it easier for investors to plan their finances and achieve their short-term goals.

Diversification

Short-term investments can include a mix of assets such as money market funds, Treasury bills, CDs, and short-term bonds, providing a balanced approach to risk management.

Low Minimum Investment

Many short-term investment options have low minimum investment requirements, making them accessible to many investors, including those with limited funds.

Limitations of Short-Term Investment Plans (New Header)

Short-term or simply small investment plans suit investors looking to park surplus funds in assets that offer returns while ensuring easy access for emergencies, with high liquidity being a key benefit. However, they have drawbacks:

Lower Returns

Short-term investments yield lower returns compared to long-term options due to their fixed, short-duration nature, lacking the compounding effect that allows wealth to grow over time.

Restricted Growth

With short tenures and no interest compounding, short-term investments offer limited growth potential, unlike long-term investments, where compounding boosts returns over extended periods.

Limited Investment Options

Short-term plans provide fewer options for portfolio diversification, restricting the ability to spread risk across various assets compared to long-term investments.

Early Withdrawal Charges

While liquidity is a strength, some short-term options like Fixed Deposits or ULIPs impose lock-in periods and penalties for early withdrawal, deterring investors from accessing funds before maturity. Always verify premature withdrawal terms and penalties with financial institutions before investing in Fixed Deposits.

Things to Consider While Investing in Short-Term Investment Plans

If you are deciding to invest in short-term investments, you should consider the following factors for better returns:

Capital Safety

When investing in short-term investment options, the safety of your capital is paramount. Opt for investments that have a low risk of losing the principal amount. Government-backed securities, high-quality corporate bonds, and insured accounts like savings accounts and certificates of deposit (CDs) are generally considered safe.

Liquidity

Liquidity is another crucial factor in short-term investments. It refers to how quickly and easily you can convert your investment into cash without significant loss of value. Investments like money market funds, Treasury bills, and short-term bond funds offer high liquidity, allowing you to access your funds promptly when needed.

Taxability

Understanding the tax implications of your short-term investments is essential, as they affect your net returns. Interest income from savings accounts, CDs, and bonds is eligible for deductions under 80C of the Income Tax Act 1961. However, certain government securities and municipal bonds may offer tax advantages.

Who Should Buy a Short-Term Investment Plan?

As an investor, it is important to know whether you are suited for long-term investment plans or short-term plans. Let us see who should go for a short-term investment plan:

• Emergency Fund Builders: Individuals aiming to create or maintain a fund for unforeseen expenses.
• Short-Term Goal Savers: Those saving for specific near-term objectives, like a vacation, wedding, or home down payment.
• Risk-Averse Investors: People prioritizing capital safety and preferring low-risk investment options.
• Income-Focused Investors: Individuals, such as retirees, seeking consistent cash flow from their investments.
• Temporary Fund Parkers: Investors looking to temporarily hold funds while awaiting better opportunities for long-term investments.

What is the Tenure of Short-Term Investment Plans?

The tenure of short-term investment policies typically ranges from a few months to three years. These investments are designed to mature within a brief period, allowing investors to achieve their financial goals soon. Common durations for short-term investment options include:

• Very Short-term: Investments with maturities of less than one year, such as money market funds, Treasury bills, and short-term certificates of deposit (CDs).
• Short-term: Investments with maturities ranging from one to three years, including short-term bond funds, certain corporate bonds, and longer-duration CDs.
• This flexibility in tenure allows investors to choose options that match their specific time frames and liquidity needs.

How to Calculate Returns From Short-Term Investment Plans?

To determine the absolute returns on short-term investment plans, use the following formula to calculate the Return on Investment (ROI) percentage:

This calculation provides the percentage return on your investment. Alternatively, you can use an ROI calculator to easily compute the gain.

Conclusion

Short-term investing is the best strategy to meet your financial goals shortly. You can secure financial independence that will help you manage unforeseen expenses with the best investment options in India for the short term. These plans offer consistency, liquidity, and minimal transaction costs, demonstrating ways to prevent undesired situations. You can therefore expect to see significant profits in a short period of time.

FAQs on Short-Term Investments Plans