Bank fixed deposits are one of the safest instrument for parking your money for the short term.
Often you are advised to invest for the long term linking your financial plan to a goal such as children’s education or retirement. But what if your financial goal has a short-time horizon? Will you stop your planning in such case?
Definitely not. But then where would you invest your money to achieve those short-term objectives? There is a clutch of investment options which you can consider.
However, you need to be very careful while investing your money for a shorter term because this requires proper risk assessment by an investor. Also, one should know that the return earned during that period of time may not be much and the capital appreciation can be muted. Therefore, if you want to gain more return, you need to invest a large corpus at the same time.
Here are some of the instruments where you can invest your money for a shorter time horizon.
Fixed Deposit: If you are a conservative investor and do not want to take much risk and your goal is short term, say about one or two years, then you can opt for a one-year or two-year term deposit which will give you higher returns than the savings bank account interest rate. Also, nowadays FDs offered by small finance banks are offering higher interest rate than bigger banks. The rate generally varies from 6-9% across all the banking sectors. These deposits are the safest instrument available for doing short-term investing. Your capital up to Rs 1 lakh is also protected by Deposit Insurance and Credit Guarantee Corporation (DICGC).
Recurring deposits: It is one of the best ways to save your money for a shorter term in instalments over a period of few months. It is commonly known as term deposit which has a maturity from 6 months to 10 years and is similar to FDs. It can be opened very easily if you have a net banking account. The interest rates are indicated by the bank once the account is opened and paid as per the due date. However, if you redeem your money before the agreed date, you may have to pay a penalty. You do not get the interest earned over a particular period of time if you make a premature withdrawal. Interest earned is compounded on a quarterly basis. You can also avail loan showing it as a collateral security.
Debt Fund: Any money which you want to invest for less than 3 months, should get invested in liquid funds. Any money that you want to invest for 3-6 months, you can put them in ultra-short term funds. You will not get any tax benefit while investing money in debt funds but if your investment exceeds 36 months then you can avail indexation benefit. Always take advisers help before investing in these funds as the investments objective should match your financial goal.
"Different investors have different needs. There may be occasions when you want to invest in debt for 1 year, the investors should consider short-term funds or accrual funds. Investments with about a 1-year time horizon should not be in pure equity products. Consider doing systematic investments in balanced funds, a hybrid product, if you can spare about 1 year." Anil Rego, CEO, Right Horizon.
“An investor should invest in short-term debt funds for goals maturing within 3 years and hybrid mutual funds for goals maturing within 3–5 years,” Manish Kothari, paisabazaar.com.Company deposits: To gain higher returns than bank FDs, you can invest your money in company fixed deposit. While investing in company FDs, you need to be cautious about few things. Firstly, you should invest in high rated company FDs. Secondly, you should invest your money in various company FDs not just in one company. Diversification is very necessary as it minimises the default risk to an extent and you can earn a handsome average return on your investments.