Short-term investment plans refer to the plans which focus on the investment of money market securities that are treasury bills, bonds issued by corporates nearing maturity, and other financial instruments that are liquid and with a maturity period of several months to several years.
The main objective is the preservation of capital with the generation of meager returns; therefore, it is a better option for short-term financial goals, funds in case of emergencies, managing cash reserves, or saving towards immediate expenses.
Such plans provide higher returns as compared to savings accounts, easy access to funds, and help maintain liquidity for investors, banks, businesses, and governments.
SHORT TERM PLANS
1. Saving Accounts
A savings account is a very safe kind of saving money but has relatively low interest of between 4% to 7%. It’s mostly for liquidity rather than higher returns and can thus be used for emergency funds or for daily transactions.
In savings accounts, the money is available anytime and not bound by any locking period.
2. Liquid Funds
Liquid funds are the types of mutual funds investing in short-term government securities, certificates of deposit, and other money market instruments. It offers relatively secured investment options with the ability to enter and exit any time.
Redemption may take nearly two days. Expected returns in terms of post-tax will be around 4%-7%. Liquid funds are appropriate for holding the money for a few days up to 90 days or more.
These funds have low depreciation risk, and the options available also come with growth and dividend features. Taxation depends upon the option chosen and tax bracket of the investor.
3. Short-Term Funds
These investments place money in securities that will mature in 1 to 3 years and have a slightly higher risk compared to ultra-short-term or liquid funds because of their longer maturity period.
The investment horizon is a few months. Like liquid funds, short-term debt funds aim to protect capital and generate some capital gains. Taxation is the same as other debt funds.
4. Recurring Deposits (RDs)
RDs is a good investment as money is placed in them periodically for an agreed term (6 months to 10 years), and such amounts can be deposited with either banks or post offices for any customer.
Interest collected on the RD is added and taxed under the head ‘income according to one’s tax slabs.
5. Fixed Deposits (FDs)
FDs are very popular among short-term investment avenues whereby a lumpy sum of money is invested for a particular period ranging from a few months to a few years at a fixed rate of interest. FDs are capital-safe and give guaranteed returns at maturity.
6. National Saving Certificate (NSC):
NSC is a type of fixed-income investment product offered by India Post. It is for 5 years, so the scheme suits those who have a very specific goal that aligns with the tenure.
Interest from investments in NSC qualifies for tax deduction under Section 80C of the Income Tax Act but the interest earned is taxed.
7. Equity Mutual Funds (Arbitrage Funds)
Also known as arbitrage funds, these mutual funds are relatively tax efficient if held for more than a year. They yield post-tax returns of around 8% and work well for investors who can accept some risk and look for tax-efficient investment vehicles.
8. Debt Mutual Funds
The money put into debt mutual funds generally remains stable and carries lower risk. Such funds always are consistent in returns, making them ideal for the investor looking for steady returns.
9. Fixed Maturity Plans (FMPs)
FMPs are almost similar to fixed deposits but is generally tax efficient. It comes with a mandatory lock-in period of three years, and its possible return can be much greater than a traditional fixed deposit.
10. Post Office Time Deposits
These deposits also are termed as post office fixed deposits. They provide the risk-free and guaranteed returns to the investors.
They can be held from tenures of 1 year, 2 years, 3 years, and 5 years. There is an interest rate ranging between 5.5 to 6.7%. There is no early withdrawal available before 6 months and the interest is taxable.
CONCLUSION
These have various characteristics, risks, and returns and thus will entail the investor to choose which best suits him/her financial goals, risk appetite, and liquidity requirements.
The diversified opportunities of growing wealth in short-term investment plans are in India to maintain liquidity and manage risks.
There is a right fit for every investor with savings account and fixed deposits that give safety, flexibility through liquid and debt funds, or the potential of returns on equity funds and corporate deposits.
The risk-reward profile of each investment coupled with their tax implications should guide investors’ decisions where they can prioritize their specific short-term financial goals.
A good mix of the short-term investments ensures that everyone manages their cash reserves appropriately, pays all their bills before they become due and thus attains financial security.