A Beginner’s Guide to Short-Term Investments in India

Short-term investments are financial instruments that are held for a short period of time, basically less than one year & are convertible into cash. These investments are best suited for those individuals who want to receive returns along with capital preservation & liquidity maintenance. They attract low-risk & lower returns than long-term investments. Examples of short-term investments are bank fixed deposits, savings accounts, recurring deposits, etc.

Tips for Investing Funds in Short-Term Investment Plans

When looking for the Best Short-Term Investment, a careful assessment has to be done. Let us evaluate some of the tips:

1. Assess Your Risk Appetite

• The risk-averse individuals are advised to invest in low-risk investment plans, such as recurring deposits, fixed deposits, short-term government bonds, etc.

• Individuals with a balanced risk approach, can invest in debt funds, short-term mutual funds, etc.

2. Prioritise Liquidity

• An investor should choose those investments which offer liquidity, i.e. readily convertible into cash without any penalties. Examples of such investments are money market funds or liquid funds.

3. Focus on Stability

• If you want to fulfil your short-term financial objectives, then avoid high-risk investments. 

• An investor should rather try to invest in stable investment plans providing predictable returns.

4. Evaluate Costs

• It is advised to look for hidden charges, penalties, exit load charges, etc., which reduce the return amount.

• Examples of such costs are exit loads charged when mutual funds are redeemed before the maturity date.

5. Diversify Your Investments

• It is advised to diversify your investments by spreading the funds in different plans rather than investing in one security.

• An example of such diversification is investing in fixed deposits & short-term debt funds, which will offer growth along with stable returns.

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6. Reinvest Returns

• It is advised to reinvest the returns received on short-term investments to take the benefit of compounding & increase overall growth.

7. Stay Updated on Market Trends

• An investor should be well aware of the market trends to make well-informed decisions.

Who Should Buy a Short-Term Investment Plan?

Let's understand the list of individuals who are eligible to buy a short-term investment plan:

• Emergency Fund Savers:

Investors who want to plan an investment to meet emergencies for incurring unforeseen expenditures.

• Goal-Oriented Savers: 

Investors who want to save funds for a specific short-term financial objective.

• Risk-Averse Investors: 

Investors who do not want to take risks & have a main focus on the preservation of capital.

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• Income Seekers:

Investors who are looking for a regular stream of income from investments that require a regular cash flow.

• Market-Timing Investors: 

Investors who are looking for a temporary investment while they wait for an opportunity to make a Long-Term Investment.

Steps to calculate Returns from Short-Term Investment Plans

The calculation of returns helps an investor to evaluate the profitability & align well with the financial objectives. Let us understand the steps:

Step 1: Identification of the Type of Plan

As we know, there is a range in short-term investment plans, which ranges from recurring deposits & fixed deposits to government bonds or mutual funds. Hence, recognising the type of investment plan will help an investor to establish the applicable formula for calculating return or applicable interest rate.

Step 2: Understand the rate of return

Examine the annual return rate on the short-term investment plan. Like, a fixed deposit has a fixed interest rate, where on the other hand, market-linked investment plans offer variable returns.

Step 3: Use Formulas

• In case of fixed income plans, the formula to calculate returns will be: Principal × (1 + Rate/100) ⁿ, where ‘n’ is the time in years.

• In the case of mutual funds, the absolute return would be calculated as ((Final Value - Initial Investment) / Initial Investment) × 100.

Step 4: Consider Taxation

Evaluate the impact of taxation on returns from short-term investment plans.

Step 5: Consider Inflation

Lastly, make an adjustment for the inflation factor, ensuring you calculate the exact value of return on investments.

Risk Involved in Short-Term Investments

Though short-term investment plans are considered to be safer in comparison to long-term investment plans, they are not 100% secure. Let us understand the risks associated with the plan:

• Market Volatility

The market-linked investments, such as mutual funds, are subject to market risks & volatility, which can have an impact on the returns. 

• Inflation Risk

The returns from fixed income securities may not provide returns taking inflation into consideration, which may reduce the actual value over a period of time.

• Liquidity

Though the liquid investments offer liquidity of funds, there are certain securities that have lock-in periods, penalties, etc., for early withdrawal.

• Credit Risk

Certain securities, such as non-government-backed securities or corporate bonds, come with default risk by the issuer company.

How to Mitigate the Risk?

To reduce the risk of something going wrong, you can follow certain steps mentioned below:

• Diversify the Portfolio

To minimise the exposure to risk, an investor should spread all their investments across different securities. 

• Research Thoroughly

An investor is advised to look for the historical performances of the securities in which funds are to be invested. Additionally, they can look into the credit ratings of the issuer company before investing their funds.

• Choose Regulated Platforms

Select the trusted & valued platforms to buy the securities for transparent & secure options.

Advantages of a Short-Term Investment Plan

Provided are the advantages of a short-term investment plan:

• Highly Liquid

They are easy to access, i.e. can be withdrawn whenever required.

• Adjustability

They can be adjusted easily as per the market fluctuations.

• Quicker Gains

They help in making quicker gains.

Conclusion

Short-term investment plans best suit an investor when they look for flexibility in investments with lesser risks, but considerate returns. An investor can consider investing in gold, which is highly liquid & can be readily converted into cash. Also, it is always advisable to diversify your portfolio by investing in funds across different plans rather than investing in one single asset. This helps in reducing the risk of capital deterioration.