What is Short Term Investing

What is Short Term Investing Everyone has tried saving for a future expense. Starting from saving for a new cricket bat in a gullak at the age of 8 to opening a saving account to save for a dream bike at the age of 20. We all have been through such phases of life. With changing times, a savings account is not sufficient to fulfil your financial goal. Why? It’s because the interest rate provided on saving account has reduced to 2.8%-3% per annum. This means if you save Rs 100 in a saving account today, after a year you will receive Rs 3 as interest. Shocking right! But what if you can invest the same money elsewhere and earn some extra returns? In this article, we will show you the roadmap for your short term investments with the 5 best investment options for the short term. Let’s begin.

What is Short Term Investing?

A short term investment is an investment made to achieve a near term financial goal. These investments are liquid and can be sold or converted into cash quickly. Short term investments help you achieve near term goals such as going on a short vacation or buying a mobile phone. The duration of short term investment varies between 7 days to 1 year.

Roadmap for your Short Term Investment

Before you start planning for the short term you should consider analysing these things.
  1. Figure out what are you planning to achieve?
  2. Look at things with a practical mindset and check how much time will it take to achieve your goal. If it could be achieved in a year, then it is a short term financial goal.
  3. Apply the SMART goal strategy. The SMART goal strategy helps you analyse if your goal is,
  • Specific
  • Measurable
  • Achievable
  • Relevant
  • Time-bound
Read more about how to develop a SMART goal based financial plan here. Once you know what are you heading to achieve. You can move on to the next steps of analysing an investment option. As your goal is a short term goal. You would want to have an investment that provides good returns with moderate or low risk and can be liquidated easily.

Why are these things important?

  • If you invest your money in a savings account it will generate tiny returns.
  • If you invest your money in risky assets then chances of loss are high.
  • If you opt for investments with low liquidity, you might not be able to withdraw them quickly at the time of need.
So, which are the best investment options which can fulfil all of these needs.

Which are the Best Investment Options for Short Term?

Fixed Deposits

If you are a conservative investor and do not want to take any risk then a fixed deposit is one of the best short term investment option for you. Generally, an FD ranges from 7 days, 14 days, 30 days, 45 days to a year or even more. However, a penalty is applied if you withdraw the money before it matures. Currently, the returns on FD ranges from 5% to 6% annually.

Recurring Deposits

Recurring deposits are different from Fixed Deposits. RDs are useful if you do not want to invest a large sum at a time. It helps you save and invest a fixed sum of money at regular intervals and provides returns between 4% to 6% p.a. This investment ranges from 6 months to 1 year or more. Similar to an FD, a penalty is applied if you withdraw money before maturity.

Liquid Mutual Funds

Liquid funds invest in commercial papers, certificates of deposits, treasury bills, etc. These liquid funds can be easily redeemed in T+1 days. These investments are considered safe as they primarily invest in AAA rating (highest stability) assets. The returns from liquid mutual funds range from 4% to 10% which is higher than a bank FD. Hence, it is one of the best short term investing options.

Ultra-Short Duration Fund

If you have a financial goal that is between 3 months to 6 months, then ultra-short-term funds can be the ideal investment option.  This fund has low risk and the rate of return ranges from 4.81% to 7%.

Defensive stocks

If you wish to directly invest in a share market but are afraid of extreme volatility, then defensive stocks are one of the best investing options for you. This investment option is not necessarily for short term. But it can be liquidated easily. Defensive stocks are those stocks that provide constant dividends and stable earnings regardless of how the market is performing. These stocks have constant demand in the market and due to this, they remain stable during the various phases of the market. Few examples of defensive stocks are HUL, ITC, etc. On average both the stocks have provided returns of 12.89% and 12.12% in the last 20 years. Recommended reading: Best stocks to buy in India
Investment options  Yearly  returns Liquidity  Holding Period Features 
Fixed Deposit 5-6% Premature withdrawal is allowed with a penalty 7 days to 1 year or more. Bank FDs are one of the safest short term investment option preferred among retail investors.
Recurring deposit 4%–6% Premature withdrawal is allowed with a penalty 6 months to 1 year or more.   Recurring deposits are most popular for short term as you can invest in small portions.
Liquid Mutual Funds 4%-10% Highly liquid The underlying papers mature in 91 days Liquid mutual funds are a preferred investment option as they are highly liquid.
Ultra-Short Duration Fund 4.81%- 7% Highly liquid. 3 months to 6 months Ultra short term funds provide higher returns than a bank FD.
Defensive stocks 10%-12% Highly liquid A year or more. Defensive stocks are a preferred investment option for low-risk investors who wish to directly invest in the stock market.

Final thoughts

As we make a financial plan, be it short term or long term the basic motive should always be creating wealth. However, you must also take calculative risk which will not erode your capital. So, your primary goal should be making money and preserving capital at the same time. In this article, we have discussed the 5 best short term investment options. They can help you earn good returns with moderate to low risk and can be easily liquidated. Also, as you have invested your money for the short term, you cannot expect your investment to grow swiftly. If you want higher returns, you need to invest a larger corpus or invest for the long term.

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