Laila Keith
Short-term investments are financial instruments with a maturity period of five years or less. They are designed to preserve capital and generate modest returns, with the added benefit of liquidity. Some common examples of short-term investments include high-yield savings accounts, money market accounts, government bonds, and treasury bills.
Short-term investments are ideal for those with immediate financial goals or those looking to take advantage of market opportunities. While they may yield lower returns compared to long-term investments, their flexibility and reduced exposure to market fluctuations make them a valuable tool for managing short-term financial needs.
When considering short-term investments, it is essential to prioritise capital safety, liquidity, and tax efficiency. Additionally, diversifying your portfolio across various instruments can help balance risk and enhance overall stability.
| Characteristics | Values |
|---|---|
| Investment type | High-yield savings accounts, money market accounts, cash management accounts, short-term corporate bond funds, short-term U.S. government bond funds, money market mutual funds, no-penalty certificates of deposit, treasury securities, fixed deposits, recurring deposits, national savings certificates, liquid funds, non-convertible debentures, corporate or company deposits, post-office time deposits, ultra short-term funds, equity mutual funds, fixed maturity plans, stocks, derivatives, large-cap mutual funds, short-term debt funds, debt mutual funds |
| Investment period | Less than 2 years, 2-3 years, 3-5 years, 5-10 years |
| Risk level | Low, medium, high |
| Returns | 3-8%+ |
| Liquidity | High, low |
| Accessibility | Quick and easy access to funds, no significant penalties |
| Tax implications | Taxed as per income tax slab rate, different instruments have different tax liability implications |
What You'll Learn
High-yield savings accounts
You can typically earn much higher interest rates at online banks than at national, brick-and-mortar banks. Plus, you can usually access the money by quickly transferring it to your primary bank or via an ATM.
Savings accounts are highly liquid, and you can add money to the account. However, savings accounts typically only allow up to six fee-free withdrawals or transfers per statement cycle.
- SoFi Checking and Savings: Best for High-Yield Online Savings Accounts, 4.50% APY
- CIT Bank Platinum Savings: Best for High-Yield Online Savings Accounts, 4.70% APY
- Capital One 360 Performance Savings: Best for High-Yield Online Savings Accounts, 4.10% APY
- UFB Portfolio Savings: Best for High-Yield Online Savings Accounts, 4.83% APY
- Barclays Tiered Savings Account: 4.50% APY
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Money market accounts
You can open money market accounts at many banks and credit unions. The interest you can earn on the account is the key reward for money market accounts.
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Short-term bond funds
Investors in short-term bond funds earn a yield, which measures the income produced by the bonds in the portfolio relative to the current market price.
- SPDR Portfolio Short-Term Corporate Bond ETF (SPSB)
- IShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB)
- Schwab 1-5 Year Corporate Bond ETF (SCHJ)
- Vanguard Short-Term Bond ETF (BSV)
- Fidelity Short-Term Bond Fund (FSHBX)
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National Savings Certificate
NSC involves short-term investments that earn interest at fixed rates. The maturity period for NSC investment is 5 years. The minimum investment amount is INR 1,000 (or multiples of Rs 100) and there is no maximum limit. The interest is compounded annually and paid at the end of the certificate's maturity.
NSC is a popular tax-saving instrument as it allows investors to claim up to INR 1,50,000 under Section 80C of the Income Tax Act, 1961. The interest earned on the investment is also credited back to the principal investment and qualifies for a tax exemption.
To invest in NSC, you can visit any post office in India or purchase it through the online portal of India Post. The required documents include identity and address proof, such as a PAN card, Aadhaar card, passport, driver's license, etc.
NSC is a safe and secure investment option, ideal for those looking for short-term investments with guaranteed returns and capital protection.
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Liquid funds
- No entry and exit load: Liquid funds can be bought and sold without incurring extra charges, making it easy for investors to enter and exit the investment.
- Variable minimum investment: Liquid funds offer flexibility in investment amounts, catering to various budgets and investment goals.
- Low-interest rate risk: Due to their short maturities, liquid funds carry minimal interest rate risks, providing stable returns.
- Quick redemption: Funds can be withdrawn quickly, typically within 24 hours, ensuring high liquidity for investors.
- Short-term investors: Liquid funds are suitable for individuals seeking short-duration investments with low-risk returns, as they generally mature within 91 days.
- Cash reserve holders: Investors with surplus cash can use liquid funds to earn slightly higher returns compared to traditional savings accounts.
- Investors transitioning to equity funds: Those moving from conservative to growth-oriented investments can benefit from the stability and low-risk returns offered by liquid funds.
- Emergency fund builders: The high liquidity and competitive returns of liquid funds make them ideal for building emergency reserves, allowing quick access to funds in unexpected financial situations.
Overall, liquid funds are an excellent investment option for those seeking low-risk, stable returns with quick and easy access to their funds. They are a reliable choice for short-term financial goals or as temporary parking funds, providing a potential return higher than savings accounts. However, investors should conduct thorough research and consider their financial goals, risk tolerance, and investment horizon before investing in liquid funds or any other mutual fund.
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Frequently asked questions
Some examples of short-term investments include money market funds, fixed deposits, certificates of deposit (CDs), savings accounts, and short-term government or corporate bonds.
Short-term investments are highly liquid and low-risk, allowing investors to quickly withdraw their funds without significant penalties. They are suitable for short-term financial goals and unforeseen expenses.
Short-term investments typically offer lower returns compared to long-term investments like stocks.
Some of the best short-term investment options include high-yield savings accounts, money market accounts, short-term bond funds, and exchange-traded funds (ETFs).
