Short-term investments are those made with an objective towards earning you decent returns in a shorter timeframe, typically up to one year. However, they should be done smartly in order to maximise your returns and protect your portfolio against possible losses. Here are the tips that you should keep in mind before finalising your decision.
What to Know While Making Short-Term Investments
Here are a few key aspects worth considering while making short-term investments smartly to earn good returns.
Safety of Your Capital – Ensure that your capital safety is intact when choosing short-term investments. You should choose those instruments which have lower risk profiles in order to keep your principal amount secure. You may choose to balance your portfolio with safer and low-risk options like debt instruments, bonds, government securities, and certificates of deposit, keeping in mind that risk profiles can vary widely among these options.
Liquidity Aspects – Check how liquid your investment actually is before going ahead. These plans should ensure easy access to the funds you require anytime. Choose instruments that you can cash out swiftly, noting that some may incur penalties for early withdrawal.
Taxation Aspects – Remember that your goal should be building a tax-efficient investment portfolio. Make sure that you consider the tax liabilities of various kinds of instruments before you decide, as tax implications can vary significantly based on the holding period.
Short-Term Investments to Choose From
There are various types of short-term investments that you can pick from, including the following:
Liquid Funds – These deploy investments in very short-term securities and government certificates (up to 91 days). You may easily exit or enter these funds to earn decent returns for periods up to 90 days or slightly more. You may select growth or dividend options, although keep the taxation aspect in mind beforehand, as they are taxed like regular debt funds.
Short-Term Funds – With a maturity period of 1-3 years, these funds offer slightly higher risk levels. Taxation is similar to regular debt funds, and you may choose them after considering your risk appetite, liquidity, fees, and charges, etc.
Bank Deposits – Fixed deposits and other deposits of varying durations are also worth considering. These may be from 7 days to a few months and more. You should take the interest earnings and taxation on the deposit into account, as they can be taxed as per your income tax slab.
Recurring Deposits – RDs are secure investment options, and you can choose them for about 6-12 months or even more to earn good returns. Remember, however, that RD interest is taxable.
Equity Mutual Funds – Equities are riskier options, although they have the potential of generating higher returns. They are generally recommended for longer-term investments to ride out market fluctuations, but can also be considered for short-term investments with caution.
Debt Mutual Funds – These funds deploy money into fixed-income securities like corporate debt securities, government bonds, debentures, etc. They can carry risks depending on the types of securities held within the fund, especially if investing in corporate bonds versus government securities, and typically offer relatively lower risks and stable returns.
Post Office Time Deposits – You can invest for a minimum of 1 year in these deposits, which have negligible risks and come with guaranteed returns. Interest is payable every year, and early withdrawals are generally not allowed.
Treasury Securities – These help invest in government bills and bonds and are low-risk options. However, they are typically more suitable for institutional investors, as they may not be easily accessible for individual investors looking for short-term options. They often have longer maturities than typical short-term investment horizons.
These are a few of the investment options that you can pick from. Check for tax-efficiency, returns, risk levels, and other factors before making a final decision.