Short-term investment plans that offer greater liquidity, lower risk

Short-term investments are often defined as temporary investments or marketable securities which can be easily converted into cash, generally within five years. Any investment is called short-term if it is made for a short period of time, has high liquidity, gives optimum returns for less investment and has low risk associated with the process.

Among the benefits of short-term investments are that the gains are reflected directly on one’s income statement and also help diversify income types, in case of market volatility. These plans are more focused to meet near expenses such as holiday, than long-term plans such as higher education.

It is observed that investors who aren’t interested in waiting for years to get their money multiplied many times over are usually inclined towards short-term investments which give quick and effective results. Such investments enjoy more popularity among seasoned investors.

Among the most popular short-term investment options are recurring deposits, money market accounts, bank fixed deposits, debt instruments, post-office time deposits, large-cap mutual funds and corporate deposits.

Also Read: A simple, 3-step approach to build a long-term investment portfolio

Recurring deposits

A recurring deposit (RD) is a term deposit that is offered by most Indian banks. One can open an account for tenure as less as six months and in multiples of three months. Usually, the scheme comes with a minimum lock-in period of one month. In case of premature closure of the account, only the principal amount is paid to the depositor.

The scheme offers benefits such as guaranteed returns, liquidity and flexibility. Also, the interest rates keep varying from time to time.

Money market account

A money market account is a deposit account that pays interest based on current interest rates in the money markets. The interest rates paid are generally higher than those of savings accounts. Also known as liquid funds, one can open a money market account for a tenure of fewer than 13 months.

The scheme provides high liquidity and guaranteed return. The profit earned on the money invested is added to the income of the individual and the person is taxed accordingly.

Debt instruments

These are monetary tools an individual, government entity, or business entity can utilise for the purpose of parking capital. Debt instruments provide capital to any entity that promises to repay the capital over time. Securing capital with no fear of market volatility, debt mutual funds are a good place to invest in. Such investments usually vary in time duration for which they are made.

The schemes offer low risk and regular returns to the investors. Usually a short-term capital gain tax (STCG) is charged on the debt fund.

Post-office time deposits

The scheme is offered by India Post and is popular in rural India. One can deposit for a tenure of one, two, three or five years. In this scheme, the interest applicable to the deposited amount is on a yearly basis. Before the completion of six months, the post office doesn’t allow any premature withdrawal.

Large cap mutual funds

Under these schemes, investment is made selectively in the stocks of large business organisations to achieve good returns in a shorter period of time. The returns usually come within a time span of one to three years of investment.

Bank fixed deposits

The most popular short-term investments are fixed deposits that allow the individual to put a lump-sum amount in the bank for a fixed period ranging from seven days up to 10 years. The scheme offers liquidity and fixed interest rate on investment.