6 Short-Term Investment Options: Achieving your financial goals requires a combination of short- and long-term investments. Short-term investments are crucial in providing liquidity and funding immediate financial needs. If you want a substantial return within one year, these investment options can help you achieve your financial objectives.
Here, we will explore some of the top short-term investment options offering attractive returns within a year.
Fixed deposits are one of the most popular short-term investment choices. They provide a safe and secure way to park your money while offering competitive interest rates. Most banks and financial institutions offer FDs with varying tenures, typically seven days to 10 years. To maximise returns in a year, opt for shorter terms, such as six to 12 months, as they offer higher interest rates than longer-term deposits. FDs are also an ideal option for risk-averse investors.
The State Bank of India (SBI) currently offers an interest rate of 5.75 per cent for deposits with a maturity period ranging from 211 days to less than one year. On the other hand, small finance banks have the potential to provide interest rates of up to 6.50 per cent for durations less than one year. It's important to remember that the interest earned on FDs is subject to taxation based on the applicable income tax slab rates. "It might sound weird, but yes, today they are giving yields of eight per cent+ and amount up to Rs 5 lakh (principle + interest ) is secured by Deposit Insurance and Credit Guarantee Corporation (DICGC)," says Anant Ladha, founder of Invest Aaj For Kal.
Recurring deposits are another excellent short-term investment option, especially for individuals who want to invest smaller amounts of money regularly. Similar to FDs, RDs offer a fixed interest rate for a specific tenure, which can be as short as six months or one year. The interest is compounded quarterly, allowing you to earn a decent return within a year. RDs are a great way to cultivate a savings habit while earning a reasonable interest rate.
Arbitrage funds are a type of equity mutual fund that aims to exploit price differences in the cash and futures markets. These funds are considered low-risk and tax-efficient. Although they are categorised as equity funds for tax purposes, they typically provide relatively stable returns in the short term, making them a viable option for one-year investments. “For a time horizon of one year, arbitrage funds can give tax-efficient returns of over five per cent. They use equity in base, so equity taxation applies on them, which can be useful for investors in high tax brackets,” says Ladha.
Short-term debt funds are mutual funds that primarily invest in fixed-income securities with shorter maturities, such as government bonds, corporate bonds, and commercial paper. These funds are relatively less volatile than equity funds and provide a stable return. Investing in short-term debt funds for one year can yield attractive returns, often higher than traditional fixed deposits.
Liquid mutual funds are ideal for those who seek higher returns than traditional bank savings accounts while maintaining liquidity. These funds primarily invest in money market instruments and short-term debt securities, making them suitable for short-term investments. Liquid funds typically offer higher returns than savings accounts and come with no lock-in period, which means you can redeem your investment anytime without incurring any exit load. "If one has an appetite for it, then they can also explore liquid funds as the interest rate cycle might peak soon and give the opportunity to make a decent return on account of that," says Abhishek Kumar, founder and chief investment advisor at SahajMoney.
Non-banking financial companies (NBFCs) and corporations offer corporate fixed deposits. While they often offer higher interest rates than traditional bank FDs, they come with a slightly higher level of risk. Before investing in corporate FDs, it's essential to research the company's creditworthiness and financial stability. Opt for reputed companies with a good track record