I am getting many queries regarding short term investment options in India. People are continuously searching for the best investment option for long-term as well as short-term.
In this article, we will explore the best short term investment options in India.
What is Short Term Investment?
The investment for a shorter period of time frames that range between 1 week and 1 year is called short term investments.
The time period may be from a few days to a few years according to your requirement. There is no specific time frame that can differentiate the short term and the long term.
Generally, an investment period of less than 1 year is called a short-term investment. 1 year to 5 year investment period can be called a medium-term and if the investment is for more than 5 years it can be called a long term investment.
Why Short Term Investment is Required?
Short-term investment is required to achieve various short-term goals in your life.
- If you have to buy a laptop (to start for passive income) within 3 months and for that, you are saving money this is called a short-term goal which is 3 months away.
- You are planning to buy a motorbike (to reduce the daily transportation cost) next year for which you want to save from now. This is also a short-term goal which is 1 year away.
- You have decided to buy a flat (to fulfill a Long time dream) within 3 years. You need to save the advance amount which is to be paid to the builder during booking.
The above examples are the perfect reasons to invest in the short term even if we all know that the investment for the long-term gives you the best result for wealth creation.
Investors are continuously searching for investment products with high return with minimum risk.
Liquidity is also the biggest factor for a short-term investment.
Let’s now figure out the best short term investment options in India to park your hard earned money for better returns.
8 Best Short Term Investment Options in India for 2021
Savings Bank Account
When you have some money in your hand which can be invested and you don’t know where to invest it is lying with your savings bank account.
This is quite common for many of us.
Generally, a savings bank account gives you a 3.5%-4% return per annum.
Have you ever explored the option of getting more than a 4% rate?
IDFC First Bank provides a higher interest rate of 6%-7% per annum.
You can read another article on ‘How to Get the Highest Savings Account Interest Rate’ to explore the maximum benefit of a savings account.
You can withdraw the money any time you need. The savings bank account has the highest liquidity and it has no risk as such to get the return.
Moreover, the interest of a maximum of Rs 10,000 is earned from a savings bank account is tax-free under section 80TTA of the income tax act.
A recurring deposit is the best option to save money systematically for 6 months to 12 months’ time frame.
You can start a recurring deposit online from the comfort of your home if you have an online banking facility.
The recurring deposit can be done for any amount you want. According to your goal, you can set the monthly investible amount. It gives you an interest of 6-7.5% interest for a one-year investment.
Though there are alternatives for the recurring deposit to invest in the long term. You can think of investing in equity mutual funds when you have a long-term goal.
Short term Fixed Deposits
If you have lump sum money in your hand and you need the money after a few months or years you can invest in the short-term fixed deposits.
Short-term fixed deposits can be done in all banks.
You can invest in the fixed deposits and redeem them when required by the use of an internet banking facility easily.
When you redeem it online the maturity amount is directly credited to your savings account.
A tax-saving fixed deposit is having a tenure of minimum 5 years. So tax-saving fixed deposits have not been considered for this article.
Though the investment in the tax-saving fixed deposits has tax benefit under section 80C the interest earned is taxable.
You don’t get any tax benefit for short-term fixed deposits. When you have surplus cash you go for the short-term fixed deposit which is not required for tax benefit.
So your time to achieve the goal and the interest rate is the criteria to choose the best short-term fixed deposit.
Also Read: What are Safe Fixed Deposit Options in India
Debt Mutual Funds
There are various Debt mutual funds in which you can invest for short time period.
The Debt mutual funds invest in the debt products such as government securities, bonds and money market instruments. The rate of return per annum is 6%-8% for short-term mutual funds.
Though the investment in mutual fund is not guaranteed in the hand of the investor. The short-term mutual funds invest in government securities bonds which are having fixed returns and low risk.
HDFC Ultra Short Term, Axis Ultra short term funds are some of the best short term investment options in India.
You should invest in short-term mutual funds when you have the time of 6 months to 1 year time period.
You may be interested in How to Effectively Use Debt Funds When Interest Rates are Falling?
Liquid Mutual Funds
The liquid mutual fund is one of the great short term investment options in India to invest for a very short term.
You can invest in these funds from 3 months to 6 months and get a return of about 6%-8% per annum.
This is debt mutual fund that invests in bank certificates of deposits, treasury bills, commercial paper, etc.
As the liquid mutual funds invest in fixed return instruments the chances of losing your capital is less.
Hence it is less risky in terms of capital protection.
Axis Liquid Fund, L&T liquid fund, UTI Liquid Fund are some of the great liquid funds to invest for short term.
Also Read: How to Pick Liquid Funds?
Fixed Maturity Plans
Fixed maturity plans (FMP) are closed-ended funds which invest in debt instruments.
The maturity of the plans is decided based on the maturity of its assets. The period of FMPs is generally 1 to 3 years.
These types of funds are launched by different fund houses throughout the year.
You have to invest in the offer period only and wait until maturity for the money. You cannot redeem the fund before the maturity period.
So FMPs have less liquidity than liquid or short-term debt mutual funds.
FMPs give you 7% to 9% return per annum. The taxability of FMPs is the same as debt mutual funds.
Generally, the period is more than 3 years so that investors can get the indexation benefit while calculating the long-term capital gain tax.
Short Term Investment Options in India with High Returns & High Risk
An arbitrage fund is a fund which leverages the price difference across the different markets.
These funds buy the securities from one market and sell the same in another market to get the benefit of the higher price in the second market.
You can invest in the short term and get 8% to 10% per annum. Those who are less risk taker and want modest returns can go for investing in arbitrage funds.
ICICI Prudential equity arbitrage fund, Kotak Equity arbitrage fund, Reliance arbitrage fund are some of the best arbitrage funds where you can invest for the short term.
Company Fixed Deposits
The fixed deposits offered by the various financial organizations especially NBFCs are called as Company fixed deposits.
They offer a high rate of return for a fixed tenure. These are different from bank fixed deposits.
Bank fixed deposits are insured up to Rs 1 lakh by RBI. But the company fixed deposits are insured by any value.
The company fixed deposits are rated by different rating agencies by which you can know the risk of the deposits.
The deposits have 1 to 5 year time period and you get the return of 7% to 8% per annum. Some of the best company FD schemes are:
Mahindra Finance FD
Shriram Transport Finance FD Scheme
LIC HFL FD scheme
Investors should access the risk-taking capability before investing in short term investment options in India .
If you are a low-risk taker, you should consider bank fixed deposits, recurring deposits, and arbitrage funds.
For medium risk-taker, invest in liquid funds, short-term debt funds and company fixed deposits.