While investing in a short-term plan, you should keep in mind certain factors, such as liquidity, safety, returns, etc. As there are many plans available in the market, you should consider your risk tolerance level & investment objectives when choosing one. What is a short-term investment? It is basically a kind of financial instrument which offers a return on investment within a short span of time, normally ranging between a few days &a few years. These investments are highly liquid & less risky in comparison to long-term investments.
Under these investment plans, the final corpus amount gets impacted along with the change in interest rates & a limited time horizon. Hence, one can use an investment calculator to compare returns from different investment plans & make a well-informed decision. An investment calculator can be used to ascertain the return amount at the time of maturity by providing details, such as amount, tenure, interest rate, etc.
Who Should Invest in Short-Term Investment Plans?
Provided are the investors who should invest in short-term investment plans:
Short-Term Investors
This plan is meant for those investors who are looking forward to investing for a period of 1 month to 18 months. Hence, this plan is the most appropriate one for investors who are willing to buy a short-term investment plan.
Risk Averse Investors
These plans best suit risk-averse individuals, i.e., those who are reluctant to take risks & have low risk tolerance. This can be done by investing funds in fixed-income assets.
Investors Seeking an Alternate Source of Income
As the funds are invested in fixed-income assets, they can earn a dividend amount without any market intervention.
Things to be considered while investing in a Short-Term Investment Plan
Provided are the things that are to be considered while investing in a short-term plan:
Risk Tolerance
As we know, short-term investments attract less risk, but one should choose the plan that best suits one’s risk appetite & comfort level.
Investment Objective
An individual, when considering short-term investments, should define the investment objectives & the time period within which they will be requiring funds back.
Interest Rates
Also, before investing, one should make a proper comparison of the different options available to get the maximum returns.
Liquidity Needs
One should invest in a plan that will provide liquidity, i.e. you can withdraw the funds without thinking about the delays or penalties.
Inflation
One should also consider the inflation factor while calculating return on investments, mainly when you are opting for low-risk options.
Tax Implications
Take into account the tax implications of short-term investments, i.e. short-term capital gains may attract higher taxes than long-term capital gains.
Fees & Charges
Have a proper understanding of the fees & charges associated with the investment plan chosen.
Top 1-Year Investment Plans in India
Bank Fixed Deposit
It is considered to be the safest & best investment plan for 1 year, this is due to banks being involved.
Tenure
Under Fixed deposits, investments can be made for a period of 6, 9, 12 months or longer as offered by different banks.
Liquidity
Fixed deposits can be renewed, i.e. reinvested after the maturity date if not required immediately. They can be invested for a period of a month, half-year, quarter, or year.
Returns
The tenure of return can be monthly, quarterly, half-yearly, yearly, or cumulative.
Taxation
The interest amount on fixed deposits is eligible for a tax deduction under the Income Tax Act, 1961, according to the income tax slab.
Recurring Deposit
Under this plan, investments are to be made at a regular interval for a specific period.
Tenure
It can be opened for a period as short as 3 months & for a maximum of 1 year. If you want to achieve short-term goals, an RD for a year can be opened. Funds can be used after one year’s completion.
Liquidity
It can be closed within the lock-in period of a minimum of 1 month.
Returns
It is similar to that of a normal bank’s FD rate.
Taxation
TDS would be deducted on the amount of interest earned in case the interest received exceeds INR 10,000.
Post Office Term Deposit
Tenure
It can be for a period of one, three or 5 years.
Liquidity
The interest amount will be received on an annual basis, & premature withdrawal of funds is allowed once a period of 6 months has been completed.
Returns
The return amount remains fixed, like in the case of short-term plans, the amount would be invested on a monthly basis, & interest would be paid on an annual basis. The interest amount would be calculated on a quarterly basis.
Taxation
The interest amount received gets added to the earnings for taxation purposes.
Fixed Maturity Plans
Tenure
It ranges from 1 month to 5 years.
Liquidity
The funds should be invested under this plan so that they can be left untouched for that period, as the liquidity is low.
Returns
They are debt-oriented funds that offer consistent returns, protecting from market-related fluctuations.
Taxation
The profits earned after a period of 3 years will be taxed @ 20% after indexation.
Arbitrage Mutual Funds
Tenure
These are open-ended funds that can be maintained for a period of 1 year to avail of tax benefits.
Liquidity
High liquidity.
Returns
The returns are around 6% p.a., which are neither consistent nor confident.
Taxation
These funds are eligible for taxation benefits.
Debt Mutual Funds
Liquidity
It allows redemption of funds in a short period of time.
Returns
The returns are around 7% p.a., which are neither consistent nor confident.
Taxation
The profits earned within a period of 3 years will be added to your income for tax calculation purposes. &, the profits earned over 3 years will be taxed at @20% after indexation.
Conclusion
Investment is a crucial decision that helps to achieve your financial goals, as relying merely on savings is not enough. One is required to invest in the appropriate investments to grow & nurture their funds. Short-term investments offer many benefits, including liquidity, diversification of funds, fewer risks, higher returns, & flexibility. One should assess the financial objectives, i.e. whether long or short, before buying a plan. Look for different options available & then compare them to buy a plan.