Best Way To Invest Money Short Term
Saving up for a Car, that dream Bike, a piece of jewellery or just an exotic holiday – short term goal-oriented planning is a must. In the financial world, asset allocation is crucial. Long term with risk and short term with liquidity is often the mantra. Any investment which is for a period of less than 1 year is a short term investment or otherwise called an alternative investment, such investments are good if you have a goal to fulfill in the near future or are just plain risk-averse and want liquidity as an option. If you are the one who is just beginning your investment journey may be going at it slowly and steadily will help you gain that confidence.
Investing money is a crucial part of personal finance management. Whether you are saving for retirement, buying a house, or simply trying to grow your wealth, investing is an effective way to make your money work for you. However, investing can be confusing, especially for those who are beginners to short-term investment in the world of finance. With so many options available, it can be challenging to decide where to invest your money. One popular investment strategy is short-term investing. In this blog, we will discuss the best way to invest money short-term, why people should consider short-term investments and the benefits of short-term investing.
Short-Term Goals: How To Prioritize Them?
Clearly identify your investment objectives. Are you saving for a down payment on a house, a vacation, or a major purchase? Knowing your goals will help you prioritize them effectively.
Categorize your goals into short-term (up to 1 year), mid-term (1-5 years), and long-term (5+ years) based on when you expect to need the funds. This will help you allocate resources accordingly.
Types of Goal | Tenure | Examples |
Emergency | 0-3 months | Unexpected illness, household repairs, and fundamentals purchase |
Ultra Short | 4-12 months | Expensed devices, advance taxes, and education expenses |
Short Term | 1-3 years | vacation, a mortgage payment |
If you’re uncertain about investment strategies or need guidance, consider consulting a financial advisor. They can provide personalized recommendations based on your goals, risk tolerance, and timeframes. Regularly review your investment portfolio and track the progress of each goal. Make adjustments as necessary to stay on track or adapt to changing market conditions.
Remember, short-term investment goals generally prioritize capital preservation and liquidity over aggressive growth. It’s crucial to align your investment strategy with the specific timeframes and risk profiles associated with each goal.
Why Should You Invest in the Short Term?
When Should You Invest in the Short Term?
Where to Invest Money in Short Term
The top 5 short term investment schemes include:
1. Fixed Deposits
Fixed Deposits, One of the safest options. Investors can earn an interest ranging from 4 to 11% per annum. Though the money cannot be withdrawn before the maturity period to avail the full benefit, premature withdrawals with some penalty are an option. FDs attract taxes.
2. FMPs
Fixed maturity plans are a type of Mutual Fund that has a Fixed Maturity date and can have an indicative return on your investment. Usually, FMPs are used by investors as a substitute for bank fixed deposits. FMPs are closed-end funds, which means that you can enter when it is launched and exit when the term is over.
3. Debt Instruments
A debt instrument is a paper or electronic obligation that enables the issuing party to raise funds by promising to repay a lender in accordance with the terms of a contract. Debt funds are high on the yield factor and provide low to negligible risk to investors. If you are planning for a short term goal or looking to grow your money in a short span of time debt instruments is an excellent option.
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4. Liquid Funds
A liquid fund is a debt mutual fund that invests in very short-term instruments like commercial papers, treasury bills, certificates of deposits, etc. These investments are a good alternative to savings deposit.
5. Savings Account
Saving Account is a reliable and safe mode to save and get returns (although very less). Opened with any bank or financial institution, money can be kept till required investors can interest, depending on the amount and duration for which money is kept in the account.
While there are a lot of other options available, the ones mentioned above give substantial returns with very low or negligible risk. Investors should choose carefully by taking into consideration the risk, return and timeline objective.
Here are some of the best ways to invest money in a short-term:
- High-yield Savings Accounts
These accounts offer a higher interest rate than traditional savings accounts, allowing you to earn a decent return on your investment while keeping your money liquid.
- Money market accounts
Similar to savings accounts, money market accounts offer higher interest rates and are also FDIC insured.
- Certificates of deposit (CDs)
CDs are low-risk investments that offer a fixed interest rate for a specified term. The longer the term, the higher the interest rate.
- Treasury bills
These are short-term government bonds that are issued with a maturity date of less than one year. They are considered to be one of the safest investments and are backed by the full faith and credit of the US government.
A few examples of short-term investment plans with an interest return are provided below:
Investment schemes | Potential ROI |
Fixed Deposits | 4 to 11% |
Government Bonds | 2% to 6% |
Corporate Bonds | 4% to 8% |
Treasury Bills | 0.5% to 3% |
Money Market Funds | 1% to 4% |
High-yield savings account | 0.5% to 2% |
Certificates of Deposit (CDs) | 1.5% to 3% |
Peer-to-peer lending platforms | 3% to 8% |
Liquid Funds | 3% to 6% |
It’s significant to remember that the ROI mentioned above are general ranges and can be influenced by market conditions and individual investment choices. It’s advisable to check the current rates and terms of specific debt instruments or consult with financial advisors or institutions to get accurate and up-to-date information.
Benefits of Short-Term Investment
Liquidity
Short-term investments are generally more liquid, meaning they can be easily converted into cash without significant penalties or delays. This provides flexibility and quick access to funds when needed, making them suitable for emergency funds or short-term financial goals.
Capital Preservation
Short-term investment plans typically have lower volatility and lower risk compared to long-term investments. They focus on preserving capital rather than seeking high returns, which makes them more suitable for individuals who prioritize stability and security.
Quick Returns
Short-term investment plans have shorter time horizons, allowing you to generate returns relatively quickly. This can be beneficial if you have immediate financial needs or want to take advantage of short-term opportunities without locking up your funds for an extended period.
Flexibility
Short-term investments offer flexibility in terms of investment choices. You can choose from various options such as savings accounts, money market funds, certificates of deposit (CDs), short-term bonds, or Treasury bills. This allows you to align your investment strategy with your risk tolerance and liquidity requirements.
Risk Management
By focusing on short-term investment options, you can mitigate the impact of market volatility and economic uncertainties. Shorter investment horizons reduce exposure to long-term market fluctuations, making it easier to manage risk and protect your capital.
Opportunity for Reevaluation
Short-term investments provide an opportunity to reevaluate your financial situation and investment strategy more frequently. As short-term goals are achieved or circumstances change, you can reassess and adjust your investments accordingly, ensuring that they remain aligned with your evolving needs and priorities.
To summarize, short-term investments are an excellent way to earn a decent return on your investment while maintaining liquidity, flexibility, and low risk.
Conclusion
Short-term investments are an excellent option for individuals who are looking to grow their money quickly in three months without exposing themselves to significant risk. With so many investment options available, it’s important to choose the investment that best suits your financial goals and risk tolerance. By investing in a variety of short-term investments, you can diversify your portfolio and reduce your overall risk. Short-term investments offer liquidity, low risk, flexibility, and higher returns than traditional savings accounts, making them a great option for anyone looking to invest their money for the short term.
