Whenever we invest, it does not mean that our requirements are always for the long term. In many cases, they may be short-term also.
In such a situation which are the best short term investment plans in India for 2021?
Is it possible to beat inflation for short-term goals?
When I say short term, my definition of short term is LESS THAN 5 years. However, the definition of short term for few may be up to 1 year and beyond that, it is always either medium-term or long term.
The motive to write this post is to highlight two incidents that I witnessed recently.
1) A few days ago, I received one question about suggesting a few equity funds for her investments.
Usually, I don’t answer directly. Instead, I always ask many questions in return.
When I asked what was the time horizon of the goal, then the answer was ONE YEAR!!. For one year purpose, few want to experiment with equity.
When I strongly suggested staying away from equity and preferring Bank FDs instead, the next question from her was that then how can I beat the inflation?
THIS IS THE POINT that I wish to discuss.
2) During the conversation with one of my clients, I had suggested him to park his emergency fund like around 1/3 in Savings Account and remaining 2/3 in Bank FDs.
My client asked me a valid question. He said, by keeping my money in low-yielding Bank FDs, I am devaluating the money. Hence, I should explore few other options.
Let me answer this also in detail.
I am expecting a NEGATIVE real return for my daughter’s educational goal!!
Yes, the reason is that it is just around 5 years away. As the goal is not medium-term also, I am moving my major investment portion into debt (where the returns may be around less than 6%).
However, the educational inflation I have considered is around 8%. Hence, the NEGATIVE REAL RETURN of 2%.
But why? The answer is, as the goal is short-term in nature, one must not look for HIGHER RETURNS.
Instead of that, to beat inflation, one must invest more. However, we want the MAGIC OF COMPOUNDING even for short-term goals also.
How risky it is to invest in volatile assets like equity when your goals are near? Are you in a position to sustain a loss and fund your short-term goals from other sources? In many cases, none thought about this.
I am not denying the power of compounding or the importance of equity. However, both of them will work for us for our long-term goals but not for short-term goals.
Hence, when the return expectations are less than the inflation rate, the only option left to achieve the goal is to invest more and more. I know it is painful. That is the reason many look for shortcuts and try to earn more returns for their short-term goals also.
Let me highlight an example. Assume that I am targeting Rs.50,00,000 for my daughter’s educational goal which is around 5 years away. I am considering the inflation rate of 8%, returns from equity around 10%, and debt around 6% (I know it is high in the current scenario but let us take for example purpose).
Now we try to target this Rs.50,00,000 in today’s scenario, then the value of this Rs.50,00,000 with the inflation of around 8% will turn to be Rs.73,46,640.
Now let us see the different asset allocations to achieve this goal.
a) With the asset allocation of 100:0 between equity and debt, the monthly required amount will be Rs.91,164.
b) With the asset allocation of 50:50 between equity and debt, the monthly required amount will be Rs.96,627.
c) With the asset allocation of 30:70 between equity and debt, the monthly required amount will be Rs.98,914.
d) With 100% into debt, the monthly required amount will be Rs.1,02,458.
Now the see the difference between the investment with 100% equity to 100% debt, it is almost an 11% increase in the investment.
So by adopting the risky asset for your short-term goals, your monthly investment will get reduced drastically. However, at what cost?
If there is any market crash, then how can you fund the loss towards the goal?
MANY OF US HAVE NO ANSWERS TO THIS. The reason for adopting the risky assets for our short-term goals is we are reducing our pain of committing more towards the goal. Today’s pain relief may hamper your financial goal.
Then what about inflation? I am not saying that one must not consider inflation for short-term goals.
However, if you look at the compounding formula, there are three variables on which our returns are depending. One is how much we invest, the second one is how far we wait and the third one is how much returns we generate.
For short-term goals, the only thing under your control is how much you invest. How far you wait is almost over now as the goal is short-term. Returns are obviously not under our control.
Hence, the only way to achieve the long-term goals is by investing more than dreaming about COMPOUNDING EFFECT or HIGH RETURNS.
In fact, in one of my earlier posts, I wrote about the compounding effect. It is only visible if your goal is more than 10 years or so. (Refer to the post “Power Of Compound Interest – NOT the 8th Wonder of the world!“).
What are the Best Short Term Investment Plans in India?
So which are the best short term investment plans in India as of 2021?
Well, I suggest – DON’T LOOK FOR FANCY or RISKY RETURNS. DON’T DREAM OF BEATING THE INFLATION.
Instead, follow the below process.
a) If your goals are less than 3 years, then use simple Bank RDs, FDs (Not even any debt funds), or Arbitrage Funds (experiment with this product only if you know what is ARBITRAGE).
b) If your goals are more than 3 years away but less than 5 years, then use a major portion of your investment in Liquid Funds and a small portion into Ultra Short Term or Money Market Debt Funds. Do remember that if you don’t know the risk involved in these products, then refer mine below posts.
As per me, if you don’t know what you are doing and where you are investing, then Debt Funds are riskier than equity funds.
Hence, choose the funds cautiously and monitor the portfolio strictly.
If you can’t do it, then use simple products like Bank FDs.
However, if you are still feeling unsafe with large money being parked in FDs, then use the Post Office FDs or RDs (as they offer 100% Sovereign Guarantee). Refer latest rates at “Latest Post Office Interest Rates January -March 2021“.
But never experiment with volatile assets like long-term bonds, gilt bonds, equity, or any other asset class. As I pointed, to beat the inflation for your short-term goal, the only answer is to INVEST MORE.
Stop dreaming about the magic of COMPOUNDING for your short-term goals.
Stop experimenting with volatile assets.
Instead, the mantra to beat your short-term goals is to go for safe products and invest MORE. I know it is painful but the only way to reach your financial goals SAFELY.
These are the best short term investment plans in India for 2021. In fact, in future too, the selection of short-term investment plans should stay the same.
As they say, principles are like diamonds. And diamonds are forever.