When you think of investments, you usually think of long term investments and distant financial goals. But what if, you need a short term investments plan. There can be several financial goals which you will need to achieve in 3-6 months. Is there an option for a short term investment that generates good returns? Let’s find out.
There are many short-term investments options for 3-6 months. These investment options are easy to invest in and generate good returns. There are several short-term investments scheme to choose from. These schemes can be broadly classified into two categories –
- Yielding fixed income
- Yielding market-linked return.
Fixed-income investments have a duration in the range of 7 days to 12 months. Few of the most well known fixed-income schemes are post office deposits, fixed deposits (FDs), company deposits, etc.
Market-linked schemes are usually debt mutual fund schemes having a standard duration of less than 12 months. Some of the mutual debt fund schemes are liquid funds, ultra-short duration funds, money market funds, and low duration funds.
Let us take a look at the most suitable short-term investments scheme for 3-6 months:
- Bank Fixed Deposits: A Bank Fixed Deposit is one of the safest short-term investments plan. Fixed Deposit can have a very short duration, say 7, 20 or 45 days. You can either withdraw or reinvest the money after maturity. At present, the rate of interest for a fixed deposit is 6.5% p.a. This rate of interest is according to the repo rate of the Reserve Bank of India (RBI). The Senior citizens get a benefit of an additional 0.5 per cent. The interest earned gets added to the investor’s net income and is taxed according to the normal taxation rules. If the interest amount exceeds Rs 10,000 p.a, there will be a tax deduction at source (TDS) by the bank.
- Recurring Deposits: Another safe and convenient short-term investments scheme is the Recurring Deposit account. The added benefit is that you can invest your money in instalment. In all the other short term investments option, you have to make a one-time investment. You can invest for a short-term, say for 6, 9 or 12 months. A recurring deposit account usually has a minimum lock-in period of 1 month. If you close your account within a month, you only receive the principal amount. The interest rates for repeated deposits are same as that for a bank Fixed Deposit. At present, it is around 6.5 per cent per annum. The interest earned gets added to the investor’s net income and is taxed as per the taxation rules. If your interest amount exceeds Rs 10,000 p, a, there will be a tax deduction at source (TDS) by the bank.
- Debt mutual funds: Debt Mutual Funds are one of the best short term investments options with a considerably high rate of return. The maximum duration possible in debt mutual funds is 12months. There are four different types of Debt Mutual Funds available:
- Liquid fund: The Liquid fund is a type of mutual fund scheme. Liquid funds invest their capital in Bank Fixed Deposits, Treasury bill, debt securities and other schemes having a maturity period of up to 90 days. The liquid funds do not have a fixed lock-in period. These funds process the withdrawals within 24 hours on business days. Liquid funds are the safest short term investments scheme under mutual funds. Another benefit is the absence of any entry or exit load. The point worth mentioning is that this investment scheme provides high liquidity and not high returns. Therefore, it is a good choice for short term investments. Some of the best liquid Mutual funds are ICICI Pru Liquid Fund, India Bulls Liquid Fund, JM High Liquidity Fund, L&T Liquid Fund.
- Ultra short-term mutual funds: The Ultra short term mutual funds usually invest their capital in corporate and state government bonds. These schemes have a maturity period of both less than or greater than 91 days. The Ultra short term mutual funds offer a lot more liquidity than any other scheme. The rate of return is usually around 7-9%, which is higher than both liquid funds as well as fixed deposits. The ultra-short term debt funds are resistant to interest rate risks because of the shorter duration for maturity. However, in comparison to the liquid funds, the ultra short term funds have a higher risk. Some of the best Ultra short-term mutual funds are Taurus Short Term Income Fund, Franklin India Ultra-Short Bond Fund, BOI AXA Ultra Short Duration Fund, JM Floater Long Term Fund, and L&T Floating Rate Fund.
- Money market fund (MMMF): Money Market Fund is a low-risk, low-return investment scheme. This scheme provides the investor with an opportunity to invest in cash and cash-equivalent assets. It is an open-ended investment plan. It invests capital in only cash and cash-equivalent investments. The Money Market funds have a high credit rating.
The fund management company invests in instruments like Treasury Bills (T-Bills), Repurchase Agreements (Repos), Commercial Papers and Certificate of Deposits. This scheme aims to earn interest for the stakeholders without facing a reduction in funds’ Net Asset Value (NAV). Investors who have extra cash in their bank accounts but want to go for a low-risk short term investments option can choose money market funds. MMMF will give you higher returns than the savings bank account.
If you want to invest in a short term investments scheme, it is important to remember a few points. You should not ignore the post-tax returns because the interest earned is added to your net income and is taxable by law. Another important thing to remember is that short term investments are made for wealth preservation and not for wealth increment. You should never compromise on security for higher returns. The purpose of short term investments is to fulfil immediate or short-term financial goals. Therefore, putting your wealth in jeopardy is not a good idea. For short term investments, you should choose schemes providing high liquidity rather than high returns. Investing in equity is also not advisable for short term investments.
