You need to park money for the short term for a variety of reasons. You could need the funds in an emergency and it needs to be as liquid as possible. Secondly, you may have a confirmed cash outflow and you cannot miss out on that. Thirdly, you may have just received a lump sum payment and you are looking to park it temporarily before taking a final call. When you park for the short term (around 1 year), you need a mechanism that is safe, liquid and also gives returns above the rate of inflation.
So, what are the best short term investment options with high returns? Are there short term investment plans for 3 months to 1 year? Above all, what are the best short term investment options where you can get the best mix of liquidity, safety and returns. Let us look at 10 such options..
Bank savings accounts
Your savings account or your checking account is a no brainer. It is as liquid as liquid can be and you can access these funds at very short notice. Of course, the rate of interest earned on these funds is just about 4% while a handful of banks give higher rates of interest of up to 5-6%. This is a great investment avenue if liquidity and safety is your primary concern.
Bank Fixed Deposits
If you want slightly higher returns of 200-250 basis points, then you can opt for bank FDs. A typical bank FD with a 1 year maturity will be available at an interest rate of around 6.5-7%, although the rates are continuously falling. Bank FDs will have a lock in of around 1 year but you can always fall upon the FD in times of liquidity needs. You can easily take a loan against your FD up to 75% of the FD value and your banker will arrange the same.
Short term Debt Funds
These are debt mutual funds which invest in debt instruments with a residual maturity of 6 months to 1 year and are intended for very short term debt investors. The returns on a debt fund will be higher than a bank FD and is also more tax efficient compared to a bank FD. Of course, there is the risk if interest rates go up but that is minimal with very short term residual maturities. They give higher returns than banks and money market funds.
Arbitrage funds use equity and futures to create the equivalent of a debt instrument. What the fund manager does is to buy in equities and sell in futures so that the price difference can be locked in. This price difference annualizes approximately to around 8-9% and that is like a fixed return instrument. The attractive feature of arbitrage funds is that they are treated as equity funds for tax purposes, although the advantage may now be slightly diluted after the imposition of 10% tax on LTCG on equity funds.
Money Market Funds
These are the lowest risk products among mutual fund offerings. Money market funds typically invest in very short term government instruments like call money market, commercial paper, treasury bills, bank CDs etc with a maturity of 3 months to 1 year. They are completely free of default risk and the interest rate risk is also minimal. They are slightly more tax efficient than bank deposits.
Fixed Maturity Plans (FMPs)
Fixed maturity plans start from 1 year plans and go all the way up to longer time periods. They invest in bonds that have residual maturity that exactly coincides with the tenure of the FMP. Remember, FMPs are closed ended plans and the only exit could be by selling in the secondary market at a discount. If you have a 1 year holding period then FMPs can be a useful instrument to add to your returns quotient.
Gold ETFs are not exactly short term investment instruments but more of hedge instruments. But gold ETFs tend to hold their value over shorter period of time. And in the event of volatility in the markets and global uncertainty, these funds can also outperform. Being listed on the exchanges they are highly liquid and can be realized in 2 days time. The value of the gold ETF s linked to the price of gold.
Post Office Term Deposits
You can open a 1 year POTD at any post office near your house. Like in case of a bank FD, these are completely secured and guaranteed by the government of India. They have a 1 year lock in but you can always pledge these deposits in an emergency and raise funds up to 75% of the value of POTD. Tax-wise, the POTDs are treated like bank FDs.
Secured NCDs and company FDs
Large and reputed NBFCs and manufacturing companies constantly approach the NCD market or the FD market to raise funds for their short term needs. You can look at these products seriously as they can give you an edge over bank FDs and POTDs in terms of returns. Normally, FDs and NCDs issued by reputed companies are safe as there is reputation at stake. Of course, in terms of tax treatment, it is not too favourable.
Repay some of your high cost loans
This may not exactly be an investment but what better way to earn 20% return than repaying your credit card liability fully. If you look at your credit card as the reverse of an investment then repaying your credit card or your personal loan is tantamount to a short term investment. This can be a very productive source of parking your short term funds.
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