Short-Term Investments: Definition, How They Work, and Examples
Let’s face it. Markets around the world are becoming extremely volatile, with changes and disruptions always around the corner. At such a time, taking a safe and strategic approach, toward investing is a prudent decision.
While investing over a longer period promises higher yields, short-term investments give you the advantage of liquidating faster. Short-term investments are also a great way to save up for a goal like buying a car or saving up for an event. But before you put your money into a short-term investment, let’s ask a simple question…
What Are Short-Term Investments?
To put it simply, short-term investments are financial instruments that are precise, highly liquid, and less risky with mostly predictable and valuable returns within a maximum span of five years.
But, how do they work?
Short-term investments have two criteria that distinguish them from other investments
- They easily convert to cash, protect the capital, and come with high scalable quality low-risk returns
- They mature within a time frame of a few months to about 3-5 years.
This investment works both for individuals and companies. Short temporary investments boost asset-building capacities for business ventures to grow. Promoting better financial positions, the additional cash offers greater flexibility in expanding the wealth in stocks and bonds.
Individuals eyeing short-term goals are benefited from satisfying interest rates in short-term periods to encash or reinvest for further growth.
So, what are the short-term investment options that can be looked at?
There are quite a few lucrative short-term investment options and on a platform like Grip, we offer some of the best ones. These include a mix of the basic ones and others that may not be so common.
So, let’s begin with some of the most common types of short-term investments. These include –
Bank Recurring Deposits
Every bank offers recurring deposits (RD) ranging from 6 months to 10 years with guaranteed returns, liquidity, and flexibility. Though interest rates change, and differ from bank to bank, you can choose a bank that offers the best returns. With a lock-in period of 1 year, this investment is treated as an added income and falls under the income tax slab. The minimum deposit is ? 500. Interest rates vary from 2.50%-8.50%. Banks cut TDS at 10% on RDs.
Fixed Deposit
One can treat a fixed deposit as a short-term investment if you are investing for 3-5 years. This is a low-risk investment where the interest rates vary from 3%-7% between banks. Ranging from 7 days to 10 years, they can be treated as liquid investments as they can be withdrawn prematurely before maturity. With a minimum deposit of ?1000, investors can invest in tax-saving FDs to take advantage of tax benefits. Banks cut TDS at 10% on FDs.
While an RD or FD is quite common and most people invest in it by default, there are other options that you can explore. These include –
Treasury Securities
These can be bought directly from the RBI platform or the stock exchange. The minimum ticket size is ?10,000/- and its multiples with a maximum of ?2 Crore. The RBI announces e-auction bids inviting investors to their 'zero coupons' type debit instrument, meaning no interest will be paid on maturity instead the T-bills are issued at a discount on face value. The investor earns from the difference between the issue price and discount to the face value. They are issued for a fixed term of 91, 182, or 364 days.
Corporate Bonds
These are debt securities issued by both public and private corporations. These bonds are used by companies to raise money for various purposes linked to building assets such as a new plant, purchasing equipment or just expanding their business. Investors buy bonds as a way of lending money to the 'issuer', or the company issuing the bond, against which the company promises to return the 'principal' amount in a specified term of maturity. Until that date, the company pays the stated rate of interest.
These bonds are issued in the primary market and then traded in the secondary market. Trading is carried out through over-the-counter organised electronic trading networks.
The purchasers are the investors buying these corporate bonds. The value and the yield of the bond may be determined by demand and supply, interest rate, and liquidity among other factors. The investor must have a demat account to purchase a bond where the bond gets deposited after the purchase. These bonds are fully taxable.
Peer to Peer Lending
When we take you through short-term investment plans with high returns and high risks, this particular investment, though still in its nascent stage, charts high up in the list. Aggregating borrowers and lenders, the platforms credit loans for a maximum of 36 months. Lending is for a maximum of ?50 lakh, the loans fetch an interest rate of 20-24%. P2P platforms retain a percentage of the interest returning the residual amount to investors.
For example, if they borrowed ?20,000 with 24% interest on a loan, the additional ?400, is an amount the borrowers consider affordable. The platforms support low ticket-size borrowers not sensitive to the interest rates, instead going by the absolute amount to be repaid. However, this investment option is fraught with risk owing to the non-standardized calculation methodology followed by some P2P platforms.
Inventory Financing
When it comes to short-term low-risk investment options, this alternative investment assures predictable and high returns. Investors put their money into a company’s raw materials or finished goods, sustaining their production cycle. Investors supporting a growing company can earn a pre-tax IRR of up to 12%. This asset-backed investment reaches its maturity in 1-13 months. With a minimum investment of ?15,000, you can fetch higher returns at low risks over other equity investments.
For example, a motorbike manufacturing company in India invites investors to finance its manufacturing parts. Investors can invest at a low-ticket size of ? 20,000 earning a pre-tax IRR of 10.5%. in a maturity period of 12 months. This investment is valuable for businesses and investors.
Asset Leasing
This is another form of alternative investment inviting curiosity from digital-savvy investors who are looking for monthly payouts in their portfolio diversification. These days companies favouring asset-light models are leasing assets over a fixed period instead of blocking capital in purchasing movable assets such as vehicles, machines, furniture plants, etc. against a monthly rental payment. The advantage of this investment is it isn't ruled by market sentiments. If you find a trusted platform, leasing as an investment will fetch you up to 21% pre-tax IRR at a minimum ticket size of ?20,000.
A company delivering scooters or renting out rooms, looking to expand their business operation, never feel cash strapped owing to investors supporting this new age symbiotic business model. These can be availed in return for monthly payments along with interest. While there is an element of risk attached as the company leasing the assets can default on payments, trusted platforms mitigate the risk considerably by conducting layers of checks on lessees.
To conclude…
Short-term investments offer a wide choice and less risky options. While long-term investments can build retirement wealth, short-term investments can be highly rewarding and help in building cash assets for potential long-term investments. The focus should be on moving and multiplying funds. Short-term high-return investment options are the perfect tool for making a smart investor out of you. So, while your money starts growing you can sit back and relax, invest, explore, and enjoy the life you had always wanted.
