Short Term Investment Plans
Some of us have short term financial goals, such as buying a car two years down the line. Investors wanting to get returns from their financial instruments in a fixed short span can look at short term investment plans. Any financial instrument whose maturity ranges anywhere from 1 to 5 years is typically called a short term investment plan. Some investors regard only those instruments as short term plans which mature in less than 12 months.
Read this article to know about these plans and their benefits, features and other general information.
Features and benefits of short-term investment plans
Broadly speaking, there are 4 main features/benefits of these plans. They are:
1. Most of these plans have low investment tenure of less than a year. Some investors have a horizon of more than a year too so they buy those instruments that mature in, say, 2-3 years.
2. These plans are highly liquid. This means an investor can quickly redeem his investment.
3. The principal remains intact.
4. Investors can optimize their returns through these plans.
Having understood the broad features of these instruments, let’s look at some of the short-term investment plans.
Types of Short-Term Investment Plans
There are at least 10 kinds of limited duration investment plans for you. Pick the one that matches your risk appetite and financial soundness.
|Serial No/ Investment||Main Features|
|1. Savings Deposits||Offered by banks. You can withdraw your money anytime you want. Yields and risks are quite low.|
|2.Liquid Funds||Risks are low, these funds are highly liquid but the yields are also low.|
|3. Debt Instruments||Most of the debt instruments have very low risk; they have low returns as well. However, there is a lock-in period when you invest in these instruments.|
|4. Bank Fixed Deposits||These instruments are quite popular among risk-averse investors. The risk is low as public sector banks are backed by the Central government. Yields, however, are low.|
|5. National Savings Certificate||If you are looking out for investments that are tax- friendly, then the NSC can be a good choice. However, returns from this investment are low. However, please note that NSC is a highly illiquid instrument.|
|6.Corporate Bonds||Liquid in nature, these instruments provide low yields.|
|7.Treasury Bills||These are issued by the government and have low risk. Yields are low.|
|8.Fixed Maturity Instruments||These have a fixed maturity date and so are highly illiquid. Risk -free in nature, these instruments provide high yields to the investors.|
|9. Floating Rate Funds||If you are looking out for risk-free instruments then these funds are just right for you. They have a limited maturity period and provide high returns.|
|10. Gold||Gold has low risk, high yield but limited liquidity|
Now let’s understand these financial instruments in greater detail.
Details of short-term investment plans
1. Savings Account of Banks
This instrument is the most popular among all the ones listed above. It is very easy to start a savings account with a bank. The best part of this instrument is that your principal remains intact. Some banks insist that depositors maintain a minimum balance in their accounts. The rate of interest is very low but there is hardly any risk associated with a savings bank account.
Popular among the housewife community, gold is one of the most stable instruments whether in short term or long term. The price of gold rises over a period and thus this investment fetches a decent return to the investor. Many people buy gold to insulate themselves from financial distress. Investors can buy gold in electronic form (ETF) also.
3. Bank Fixed Deposits
Risk-averse investors find Fixed Deposits to be very attractive. There are two reasons behind this. One, these deposits offer yields that are double than yields on savings bank deposits. Secondly, you can deposit your money for a period between 7 days and 5 years. Most investors prefer the 1 year window period. Since most bank fixed deposits are backed by the central government, these instruments are risk-free.
If you are planning to park your money in an FD, then don’t withdraw it before maturity, else you will incur a penalty.
4. National Savings Certificate from Postal Department
Another short-term investment plan that gives good yields is the NSC. Investing in this instrument helps you save taxes so a large number of salaried individuals put NSC in their investment portfolios. The minimum number of years that you can park your fund in NSC is 5 years so this instrument is highly illiquid.
Please note that the interest earned on your NSC instrument is subject to taxes.
5. Treasury Bills
There is yet another attractive investment avenue for all those desiring zero risk and high yield investment plans- Treasury Bills.
These instruments are Reserve Bank of India products and are offered every month through auctions. Typically, the maturity dates of these instruments range from 91 to 364 days. You need to invest a minimum of Rs. 1 lac to buy these bills.
Treasury Bills are as liquid as other financial instruments like equity and debt instruments. You can trade these on platforms like the Negotiated Dealing System-Order Management of the CCIL.
6. Fixed Maturity Debt Plans
These are debt instruments that have a maturity period of anywhere between a few months and a few years. There is always a good time to invest in these plans and earn a stable income.
FMPs work by assigning their assets to Commercial Papers, Debt Instruments, and Fixed Deposits etc. This means that if the maturity of an FMP is 12 months, then its asset manager will park his funds in those schemes that are maturing in 12 months or less. This way, your yield more or less matches the market interest rates.
Before investing in a Fixed Maturity Plan, take note of the following points:
a) There are no assured returns from an FMP, unlike a Fixed Deposit. Since the interest rate of your FMP hinges on that of the invested debt instrument, your returns are dependent on the market forces.
b) FMPs carry a substantial credit risk as some of the companies associated with the debt instruments might default on their payments. In light of this, investors should monitor the performance of all the FMP portfolios available in the market.
c) FMPs are also more illiquid in comparison to Fixed Deposits.
7. Short Term Floating Rate Funds
These funds invest their corpus in financial instruments and pay a variable or floating interest rate. Investors gain (or lose) by riding on the interest rates of the market that vary on a periodical basis. Yields are therefore volatile; sometimes investors gain handsomely while on other times, they may suffer a setback.
There are some important features of Short Term Floating Rate Funds. What are they?
a) These funds constitute the riskiest part of your portfolio. The reason these funds are riskier is that investments are made in companies that have low credit scores. Such companies need these funds for recapitalization, debt refinancing or to make acquisitions.
b) The short-term floating rates diversify your portfolio as these have little correlation with other investment tools like stocks, corporate bonds, and government and municipal bonds.
Government bonds are some of the most brilliant short term investment options available to investors. These are risk-free and offer high yields in the short term.
9. Debt Instruments
Many investors buy debt instruments to secure their capital. Typically, such investors have a low appetite for risk and market volatility. Most debt instruments generate yields of 10.5% (before tax adjustments).
Q.1- Are all the above short term investment plans tax-free?
A- Not all the instruments are tax-friendly. However, the National Savings Certificate does indeed help you save taxes based on your investments. A tax shall be charged on the interest on your NSC deposits.
Q.2- Can I buy these investment plans directly?
A- Yes, you can do so. However, it is preferable to invest through a certified broker or adviser. This helps in saving time and labor and also in getting valuable advice.
Q.3- What are floating rates?
A- Yields that are linked with the market rates are called floating rates. When the market interest rate goes up, your return also goes up; when there is a downside, your returns erode.
Q.4- Which plans offer assured returns?
A- Bank Fixed Deposits offer assured returns. However, please note that when you withdraw your deposit before the maturity date, you might attract a penalty.
The definition of a short term investment plan varies from one investor to another. There are plans whose maturity periods are as short as 7 days while others have 5 years. The safest investment plan is the Bank Fixed Deposit. Short Term Floating Rate Funds are the riskiest component of your investment portfolio. The National Savings Certificate is a tax-friendly investment avenue but investors would have to pay tax on their yields (subject to salary bracket). Lastly, always buy an investment product through a certified broker or adviser.