Short term investments can help you attain these objectives without jeopardising your long-term financial aspirations.
Diversification of your investment portfolio with short term investments is vital for the following reasons –
The short term investments are less risky than the long-term ones.
Short term investments are highly liquid. This implies that you can transform your investments into cash whenever you need to. This is especially critical when it comes to financial crises.
Now, let’s take a look at the top ways you can diversify your portfolio with short term investments –
The savings account is an account provided by banks which has a high degree of liquidity and is a short term investment. The benefit is that capital is secure, and withdrawal is not difficult. Interest rates differ from one bank to another, but they can range from 3% to 6% per annum. It is the best form of investment for parking emergency funds, and the interest obtained is added to your income and taxed accordingly.
RDs are a type of time deposit where a certain amount is deposited at regular intervals, namely monthly intervals. The maturity period can be 6 months or up to 10 years. The interest rates are similar to FDs and the interest income is taxable.
FDs are investment instruments offered by financial institutions with maturity periods spanning from 7 days to 10 years. They pay higher interest rates than savings accounts, so they are an attractive short term investment for investors. The interest earned is taxable at a rate depending on the individual’s tax bracket.
These are mutual fund schemes that invest in short-term debt securities and money market instruments. Such funds are considered one of the best investment plans in India as they come with low risk and no lock-in, get better returns than savings accounts, and the profits are taxed as income tax slabs.
These mutual funds invest mainly in corporate bonds and government securities with a maturity period of 1-3 years. They have a higher return than traditional FDs and are appropriate for investors who are ready to take some risk but not high.
Ultra short-term funds engage themselves in debt and money market instruments that have a maturity of about 3-6 months. They provide higher returns compared to liquid funds and are appropriate if the investment horizon is a few months. Nevertheless, they are a bit riskier than liquid funds.
Arbitrage funds make a profit by exploiting the price gap between the cash and derivative markets. They are considered safe as they hedge their positions and can give better post-tax returns.
The bank FDs are term deposits with the bank that offer a higher rate of interest than the corporate FDs. But in comparison, corporate FDs have higher risk and no deposit insurance.
These funds invest in highly liquid instruments like treasury bills, commercial papers, etc. with a maturity period of up to one year. They provide average yields, and they are suitable for conservative investors who need to earn more than a savings account.
In Sweep-in FDs, this extra amount in the savings account is automatically transferred to an FD, thus earning more returns in the form of interest constituents. They can be withdrawn at any time, thus combining liquidity and better yields.
These are government-backed securities with guaranteed returns and varying maturity periods. They are great for cautious investors as they pose almost little credit risk.
Gold ETFs are similar to physical gold, with each unit being equal to 1 gram of gold. They can be traded on stock exchanges, providing high liquidity. They are best suited for investors looking to invest in gold without worrying about storage issues and theft.
These are unsecured, negotiable, short term investment instruments issued by banks having a set maturity date. They provide better yields than savings accounts but need a lock-in period during which no withdrawals are permitted.
Bonds are debt instruments in which the issuer agrees to pay the investor a specified interest rate at regular intervals and repay the principal amount at maturity. Short-term bonds have a maturity of one to five years and can be issued by both the government and private corporations. They provide consistent returns and are suitable for cautious investors.
Commercial papers are unsecured short-term loan instruments issued by businesses to address immediate financial requirements.
Thus, it is critical to strategise your investment portfolio, balancing it with a combination of long-term and short-term assets.
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