The plethora of investment avenues helps you plan a diversified portfolio based on:
- Your investment goals
- Your risk appetite
- Overall investment horizon
A combination of these three factors helps in picking suitable investment avenues. Investment goals are your financial goals for which you accumulate a corpus. Risk appetite means your financial capability to take risks. This determines whether you should go with market-linked investment avenues or not. Lastly, the investment horizon refers to the period for which you hold the investment. It can be divided into three main segments:
- Short-term investment horizon, which includes a period from as low as 1 day to as high as 2-3 years.
- Medium-term investment horizon, wherein you look to save for the next 3-5 years.
- Long-term investment horizon, wherein you may redeem your investment after 5 years and more.
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If you are looking to invest for the short term, there are a lot of choices that you can consider. Let us have a look at some of the best short term investment options in India.
Short-term investments are helpful when you are looking to build a corpus for a goal that is coming up in the near future. For recent graduates, this can be accumulating funds for your master’s degree. Or even something like creating a fund to initiate your travel plans and check off a few things from your bucket list. The reason could be anything, and short-term investments help you get the money you require in a matter of a few short years if you invest the right way.
The following are some good options to put your funds in for the short term:
The bank savings account lets you store your surplus funds and use them as and when required. There is no lock-in period, and you can earn a fixed interest on the account balance. However, the interest rates offered are comparatively lower than other investment options.
Features of bank savings account:
- You get a cheque book to pay funds from your account. Many accounts also offer debit cards that allow you to transact without using cash.
- There might be an average monthly or quarterly balance that you have to maintain in your account. Non-maintenance of the balance might result in a penalty.
- Different types of savings accounts are available like premium savings accounts, kids’ savings accounts, women-specific accounts, zero balance savings accounts, etc.
Pros and cons of bank savings account:
Under fixed deposit schemes, you invest a lump sum amount for a specified period. The interest rate is fixed, and it depends on the amount deposited, the period of investment, and your age. In general, senior citizens enjoy higher interest rates on FDs.
Features of fixed deposit schemes:
- You can open a fixed deposit account with a bank or a post office. Non-banking financial companies (NBFCs) also offer fixed deposit schemes.
- The minimum amount of deposit usually starts from Rs. 100.
- You can choose a deposit term ranging from 7 days to up to 10 years.
- On maturity, you can withdraw the amount deposited with interest, or you can redeposit the amount again to earn further interest.
Pros and cons of fixed deposit schemes:
Recurring deposits are those wherein you deposit a fixed sum of money at different intervals for a fixed period. You choose the deposit amount, frequency, and deposit tenure. You get a fixed rate of return on the amount deposited.
Features of recurring deposit schemes:
- You can opt for the scheme with a bank or a post office.
- The minimum deposit amount starts at as low as Rs. 100.
- The interest depends on the period of deposit.
Pros and cons of recurring deposits:
Money-market instruments include treasury bills, commercial papers, certificates of deposits, etc. These are short-term avenues that help you save for up to a year.
Features of money-market instruments:
- There are a variety of different options to choose from, based on the minimum amount you are willing to invest and the return you are expecting. For instance, treasury bills require a minimum amount of Rs. 25,000, which can be further increased in multiples of Rs. 25,000 thereof. On the other hand, the minimum investment amount for a certificate of deposit is Rs. 5 lakh.
- The instruments are market-linked. However, the risk factor is low given the short maturity duration. Moreover, treasury bills are backed by the Government, which further reduces the risk associated with them.
- You can get fixed returns from investing in most money market instruments.
Pros and cons of money-market instruments:
Debt mutual funds are those that invest a majority of the portfolio in debt securities like corporate bonds and Government securities. These show comparatively less volatility and assure returns. If you are a risk-averse investor, this is a good option for you.
Features of debt mutual funds:
- There are 16 different types of debt mutual funds to choose from. However, for short-term investments, you can select ultra-short-term funds, overnight funds, liquid funds, short-term funds, etc.
- The risk is very low since debt instruments usually carry a fixed rate of return.
- Redemption within 36 months attracts short-term capital gains tax. Returns are taxed at your tax slab. After 36 months, however, you become eligible for long-term capital gains where returns are taxed at 20% with indexation benefit.
- You can invest in a lump sum or instalments through Systematic Investment Plans (SIPs), which can help you manage your monthly budget well.
Pros and cons of debt mutual funds:
If you are an aggressive investor, stock trading can help you earn attractive returns in short durations. However, this comes with a very high risk as the market is unpredictable. Provided you have a suitable risk profile and are aware of the nuances of stock market investments, you may explore stocks as an option. Note that stocks are generally long term investments and are not recommended for short term wealth accumulation due to the risk of losing the invested capital also is very high in the segment. That said, you can buy and sell shares on the stock exchange with a Demat and a trading account linked to your savings account.
Features of stock trading:
- You can buy and sell stocks on the same day, which is called intraday trading. You can also buy and hold the stocks and sell them at a later date. This is called delivery trading.
- The returns depend on the stock price movements. If prices increase, you earn a return, and if they fall, you lose capital.
- Knowledge of the stock market is needed for choosing the right stocks at the right time.
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Pros and cons of stock trading:
Equity Linked Saving Schemes (ELSS) are equity-oriented mutual funds that give you equity exposure. You get a basket of securities which experts professionally manage. Here, at least 65% of the portfolio consists of investments in equity or such securities that are equity-linked, allowing the possibility of large gains over a short period.
Features of ELSS:
- There is a lock-in period of 3 years.
- You can invest in a lump sum or through instalments in the form of SIPs, where every instalment can be as low as Rs. 500.
- ELSS are equity schemes that have high risks associated with them.
Pros and cons of ELSS
These are some of the most popular short-term investment options available in the Indian financial market. If you are looking to save up for buying a car, making a down payment on a house, or even taking a vacation in the near future, you can choose one or more of these options. Assess your risk profile and then make an informed choice. Also, create a diversified portfolio for better returns.