In Monexo’s attempt to make every investor who visits our site an informed investor we bring to you this blog where we talk about the different types of short-term investment option and the pros and cons attached to each one of them.
What are short-term investments?
Short-term investments, as the term suggests are the kind of investments where capital is locked in for a relatively short period of time with the main objective of preserving capital and earning return on the same. Short-term investments typically offer a low return, but access to the capital is relatively easy. The average term of short-term investments is not more than three years.
Let us look at the different kinds of short-term investments, such as fixed deposits, savings account investments, investments in gold, National Savings Certificates, Liquid Funds, Investment Bonds, Fixed Maturity Plans, Recurring Deposits, Certificate of Deposits, Short term floating rate funds, Treasury Bills and peer-to-peer investing.
Peer-to-peer lending makes for a perfect short-term investment option as it offers the quintessential elements of flexibility, high returns ranging from 13-30% and transactional ease when investing. If you are looking for short term investing peer to peer lending is a great avenue for you to consider. Periodic yields, safety of capital and flexibility of terms are what makes peer to peer lending an increasingly popular investment area. For investors on the look out for short term investing, saturated with the traditional avenues as listed above, then peer-to-peer lending is worth considering.
Read on for more on 5 Reasons to Add Peer to Peer Lending to your Investment Portfolio
Fixed Deposits are also known as Term Deposits. These are investments that are made with
banks or with financial institutions. FDs provide the investor with a guaranteed and periodic rate of return. Fixed Deposits are fixed for a certain period of time and the interest rates for such investments vary for different forms of investments. The risk factor in Fixed Deposits is very minimal. This kind of investment gives a higher rate of investment than Savings Bank Accounts.
Savings Account Investments
A Savings bank account is obviously one where investors can park their money to save it over long periods of time. This is the most basic and common form of short term investing. In an organized economy every individual who earns money saves it in a bank in the form of deposits in a Savings Account. The features of such an investment are:
- A Savings Bank account is a place where savings can be held very flexibly
- There is no fixed tenure for such investments and withdrawals can be made easily and anytime.
- Funds can be transferred via check withdrawals, fund transfers, online transfer facilities.
- Most Savings Accounts require a minimum balance to be maintained.
- The biggest pro with Savings Accounts is that they provide for high liquidity.
- There is almost no risk involved with Savings Account deposits.
- There is a minimum interest that can be earned on Savings Account investments.
Investments in Gold
For Indians, traditional investors gold is traditionally a popular investment choice. Here are some reasons why short term investing in gold is so popular in India.
- Investing in gold is easy and convenient.
- We love buying jewelry, so gold becomes an excuse to do just that with the hope to resell it when gold prices increases. But buying and selling jewelry involves making charges, wastage charges etc.. This is why gold bars and coins are more popular as investing options as there is no hidden cost involved in buying and selling them.
- Another popular form of investing in gold is, investing in “paper gold” which involves investing in ETFs, Mutual Funds whereby money is invested in gold and converted into units of Mutual Funds or Gold Funds and the scheme is listed in Stock Exchange.
- Returns on this form of investing are relatively higher than other short-term options.
Read more about the latest changing trend in gold investments.
National Savings Certificate
- The NSC is an Indian Government Savings Scheme that forms part of the Indian Postal Service savings scheme.
- With NSC’s there is no maximum limit for investment and there is a Tax Rebate available for NSC Savings up to Rs.1 lakh. NSC’s are specially made for salaried persons, Government Employees and other regular income groups.
- Another plus with NSC’s is that they can be used as collateral security against loans.
- The rate of interest with NSCs is set at 8%. These investments are for fixed tenures and the terms can be revisited at maturity.
These are funds where moneys are invested in money market instruments. Examples of liquid funds are certificate of deposits, treasury bills, commercial papers and term deposits. These include certificate of deposits, treasury bills, commercial papers and term deposits.
The maturity period with these kinds of deposits is usually 90 days and there is no lock in period therefore the liquidity. Liquid funds offer much higher rates of Interest than Savings or Fixed Deposit schemes and during inflationary periods the rates are even higher.
- A bond is a security issued by a Company or a Financial Institution or Government.
- Bonds offer regular and fixed payment of interest in return for borrowed money for the bond tenure.
- Many types of bonds are available including Tax free bonds, Infrastructure bonds, treasury bonds and Government Bonds.
- A bond is basically a formal contract to repay borrowed money with interest for a fixed time period that may be yearly, half yearly, monthly etc. In this way bonds are flexible investments that usually have a defined term, or maturity, after which the bond is redeemed.
Fixed Maturity Plans
- Fixed Maturity Plans are close-ended debt funds with a maturity period that may range from one month to five years.
- The objective in Fixed Maturity Plans is to provide steady returns over a fixed-maturity period, thereby protecting investors from market fluctuations and other variables.
- Fixed Maturity Plans are usually investments that are made in certificates of deposits (CDs), commercial papers (CPs), money market instruments, highly rated securities (like ‘AAA’ rated corporate bonds) that are made for a defined period of time or investment tenure. This type of investment is not close ended and is therefore not liquid in nature.
- Recurring Deposits are very similar to Fixed Deposits but are made for relatively smaller amounts.
- In this type of investing, investors can deposit a fixed amount of as low as Rs.100/- every month into this account.
- The maturity period for these kind of deposit ranges from 6 months to 120 months. Tax is deductible on the returns from this deposit only if the Interest exceeds Rs.10,000 per year. These deposits allow for premature withdrawals but this comes with a penalty.
Certificate of Deposits
A certificate of deposits in simple terms is a negotiable money market instrument issued for the amount deposited by an investor. A certificate of deposits is equivalent to a promissory note and is issued in a demat form or in the form of a usance promissory note. These instruments are issued in lieu of funds deposited for a specified time period. The maturity period for CDs is 7 days to 1 year.
Short Term Floating Rate Funds
- These are funds that carry the investment objective to predominantly invest in short term floating rate instruments.
- What floating means is that, the interest rate changes depending on the inflation rate increases during the investment period.
Treasury Bills are another form of short-term investment instruments that carry a maturity period of less than one year. Treasury Bills are instruments of short-term borrowing issued by the Central Government for periods ranging from 91 days to a year. Individuals, Firms, Trusts, Institutions and banks can purchase T-Bills.
There is no risk involved in this kind of investment and total transparency in dealing with Treasury Bills. The minimum amount that can be invested in Treasury Bills is Rs. 25,000/-.
To conclude, our financial experts at Monexo believe that an ideal investment portfolio is one that is diversified over different asset classes and investment instruments. While it is essential to have long-term investments in your investment bouquet, short term investments are a must to gain flexibility, calculated risk and high returns from your money.