Any investment which has a time period of 1 to 5 years is defined as a short-term investment. There are several advantages in availing short-term investment plans, as compared to their long-term counterparts.
One of the safest short-term investment plan available in the market is the fixed deposit. This scheme offers a fixed rate of interest ranging from 4 to 11% per annum. Though the money cannot be withdrawn before the maturity period, fixed deposits come with terms of 10 days to 10 years. Interest is paid 3 months after the commencement of the deposit and is exempted from tax under Section 80C of the Income Tax Act, 1961. Premature withdrawals may attract some penalty, as defined by the bank.
Another reliable and safe modes of short-term investment is a savings account, which can be mainly used for liquidity. Opened with any bank or financial institution, money can be kept till require. Banks pay around 4 to 7% interest rate, depending on the amount and duration for which money is kept in the account.
Investment in gold is considered one of the wisest options when it comes to investing for a short duration. The yellow metal can come handy in times of uncertainty and also offers protection and stability during banking crises, inflation or social unrest. Another benefit of investing in gold is that trends in the financial market do not affect the value of the metal. With the demand for the precious metal on a constant increase, there has been a 23.5% return on investment in the past few years.
5 Years National Savings Certificate (NSC)
National Savings Certificate by the Postal Department of India has a term period of 5 years. Being an effective investment scheme, the maturity amount is exempted from tax under Section 80C. The interest obtained, however, is taxable.
Liquid funds, which have high liquidity value, can be invested in a certificate of deposit or short-term securities offered by the government. Being secure, an individual can enter or opt out of the scheme at any time, at his convenience. A short-term investment plan, having low risk and low return investment this fund offers a fixed current income. In order to avoid fluctuating interest risks, the maturity of this fund is 90 days. The investor can choose from certificates of deposit issued by commercial banks, corporate debentures, or government treasury bills in order to invest in a liquid fund.
When an investor offers money as a loan to an entity, be it a corporate entity or the government, then it is a bond. Bonds are risk-free with high liquidity. The principal amount, with a fixed rate of interest per annum, is returned by the borrower at the maturity period. Individuals looking to diversify their investment profile can opt for bonds as a short-term investment plan.
Fixed Maturity Plans
These are close-ended debt schemes where the term of the plan is in sync with the scheme. FMPs offer attractive post tax yield with high-interest rates and are risk-free. The funds have a lock-in period of 3 years. The fixed maturity plan is similar to a bank’s fixed deposit account.
Another reliable and effective secured investment schemes, a recurring deposit account can be opened with any bank or the postal department. Recurring Deposit offered by banks have a tenure ranging from 6 months to 10 years. Investors unable to invest a huge amount and wanting a monthly investment can opt for a recurring deposit account from either a bank or post office. The interest amount received in an RD is not exempted from tax.
Certificate of Deposit
Available at banks, certificate of deposit comes with a fixed period of the maturity period. The rate of interest and the principal investment is predecided, making it a low risk, low return investment. Though the investor is aware of the amount at the end of the maturity period, premature withdrawal of funds is not allowed.
Short Term Floating Rate Funds
An open-ended investment scheme, the short-term floating rate fund offers a stable income for a specified period. With a floating interest rate, the principal amount is divided between floating securities and fixed rate securities. Investors, with short-term goals, who have an aversion to risk can choose this investment plan.
Issued by the Reserve Bank of India (RBI), treasury bills can be purchased during the auctions held either fortnightly or monthly. The minimum amount that can be invested is Rs 1 lakh with a maturity period ranging from 91 to 364 days. The rate of interest on treasury bills, which are highly liquid and low-risk investments, is determined based on the market performance.