The financial market offers various investments options for all type of financial needs. Investing in short term investments options not only increase your value of money as well as lowers your risk of running out finances when you really have pressing situation. In this article, I will share short term investment options in India. Before that let’s understand meaning of short term investments.
What do you mean by Short Term Investment?
A short term investment is something you want to do in near future or something you want to accomplish soon. Any investment which has time period of 1 to 3 years is defined as a short term investment. Investor with short term money have 3 primary objectives:
- Safety of Capital
- Flexibility to withdraw in shorter period
- Should be easy to convert them into cash
1.Saving Account: Saving bank account is one of the safest or easiest way to access your money. The biggest advantage of putting your money in saving bank account is that there is Zero Risk. It allow you to withdrawn your money at any point of time even sometimes liquid mutual fund redemption may take around 2 days.
You can expect around 4% to 7% returns from such saving account. Also you can claim tax rebate under section 80TTA of Income Tax Act of upto Rs.10,000 on money generated from your saving bank account. Anything more than Rs. 10,000 interest income is considered as “Income from Other Sources “and taxed according to your tax slab.
2.Bank FDs: Keeping your surplus money in the form of FDs has also been a common practice since ages. It is one of the safest short term plan available in market & we do not need any explanation of this. Now you can book as well as redeem FDs online .The advantage is, it is easy to handle and at the same time, if you redeem online, then you get cash immediately in your saving bank account. Returns from FDs are taxable according to your tax slab.
3.Recurring Deposits: Another reliable and effective secured investment option and also inculcates the saving habits. The big advantage of RD is that once you start a recurring deposit, the interest rate does not change. It can be opened with any bank or postal department, tenure ranging from 6 months to 10 years. Interest received from RD is taxable according to your tax slab.
4.Liquid Mutual Funds: These funds are invest in government securities, Certificate of Deposits, Commercial papers and Treasury Bills and have short maturity period of 4 to 91 days. You can expect 4% to 7% post tax return. These funds never go down from their base value under normal market conditions. It is very easy to enter and exit from these funds. You can expect 4 % to 7% post tax return. Taxation of liquid fund is exactly like other debt fund. If your holding period is less than 3 years, it is taxed according to your tax slab or if you hold more than 3 years, then it will be taxed at 20% with indexation benefit.
5.Ultra Short Term Mutual Funds: The Ultra short term mutual funds invests maximum of the portfolio in fixed deposits These funds are slightly riskier than Liquid Funds. Investments can be made in such options for the period of 1 to 3 years. You can expect a slightly higher return However, taxation rules are same as that of liquid Mutual Funds.
6.Fixed Maturity Plans (FMPS) : These are closed ended debt Mutual Funds that invest in treasury bills, certificate of deposit and government bonds. FMPs are consider as a less risky. They are exactly like bank FDs.However, they are more Tax efficient compared to FDs and you can expect better returns than FDs.
7.Arbitrage Funds: Arbitrage funds take advantage of mispricing of securities in different markets. Simply stated, the fund manager buys a stock (shares) in cash and sells the same in future market. The difference between the two is your return on investments. It is a variant of equity mutual funds but best suited for investors having short term investment horizon like 1-3 yrs
All these short term investments may not be suitable for everyone. They would depend upon the risk appetite and tenure of investments .Before you take a decision on these investments, have clarity regarding the terms and condition of the product or instruments.