Investors enter and exit markets at all times, but the hallmark of a great investor is the ability to spot opportunities and make the most of them. As markets are inherently volatile, short-term investments have emerged as a popular option for investors to cash in quickly and avoid losses.
If you’ve been considering a short-term investment, you’re in the right place. Here’s everything you should know about short-term investments and some of the best ones in the market today.
What is a short-term investment?
Also known as temporary investments or marketable securities, short-term investments can be converted into cash with ease. Short-term investment plans are thus highly liquid; they allow investors to reap the benefits much sooner than longer-term ones—usually in less than five years.
For investors looking to meet short-term financial goals, this is a go-to choice.
Why should you choose short-term investments?
Two quick answers to the question in the title here:
- Quicker returns: One of the most significant and obvious perks of short-term investing is that they give investors returns early. Most long-term investment options require a longer maturity period, a feature that makes them restrictive to those looking to liquidate early. With short-term investments, liquidating is easy and the sell-off process may be initiated at any time.
- Fewer risks: Short-term investments allow profits to be made within short periods, reducing the risks associated with market volatility. Short-term investment decisions can be reversed within days. When markets are unstable, the short-term investor can cash out to avoid or cut losses. These advantages and the high returns make short-term investments popular in India and abroad.
A disclaimer, though, is that sometimes, the returns the investor hopes to earn while investing can be wiped off by high transaction costs. Profits from a short-term investment stint can also be affected by taxation or inflation. To take advantage of short-term investing and avoid costly mistakes, the investor needs to know how all of this works.
How do short-term investment plans work?
Short-term investment plans are designed to benefit companies, individual investors, and institutions that invest funds. They aim to protect capital and generate returns much like a savings account.
As short-term investment plans come with their share of benefits and risks, they are usually preferred by investors who have a strong cash flow. Investors with sound financials are better placed to set aside excess funds for purchasing stocks, bonds, and other securities—all options that could fetch good investment returns.
Requirements for short-term investments
For an investment plan to be considered optimum as a short-term investment, it must meet some basic requirements. They are:
1. Liquidity: The investment plan must be highly liquid, which means that it should be easily convertible to cash. Some liquid investment options include stocks traded on major exchanges or cryptocurrencies listed and supported by major crypto exchanges. Investors should be able to sell them whenever they want to and convert them into liquid cash.
2. Intention to sell: A viable short-term security option should be owned by an organization that intends to sell it or liquidate it within a short time. A short period usually means less than 12 months. Some short-term investment options such as short-term papers fall under this category because they mature within a year.
3. Stability: The best short-term investment plans have a reputation for stability. These investments are often insulated from periodic fluctuations. One way to identify a stable short-term investment option is to check whether it carries a government guarantee or is protected by insurance.
4. Low transaction costs: Good short-term investments make it easy for investors to get their money in and out. This feature is important since it protects the investor from losses when the returns are marginally low.
Short-term investments with high returns in India
Listed below are a few short-term investment options for you to consider and research.
Which is the best investment for the short term?
There are many options to select the best investment in the short term. Here are a few examples of short-term investments for you:
High-yield savings account
Different banks have high-yield savings accounts that provide a viable alternative to a checking account. Placing your funds in a savings account is a great way to protect your money while earning decent returns from the interest rates offered by banks. It is good to compare the interest rates of various banks before you decide to open an account because the rates can vary significantly.
Short-term corporate bond funds
Corporate bonds are great short-term investment options issued by corporations. When corporations require funds to finance their operations, they issue bonds and, in return, pay interest within a specific period. Corporate bond funds are known to diversify their interests across different portfolios, dedicating at least 80% of their funds to highly-rated companies. Corporate bond funds are highly liquid and can be sold at any time, which insulates the buyer from inflation and market volatility.
Money market accounts
Money market accounts are bank deposits that require a minimum investment amount. Money markets are ideal for investors and corporations since they are liquid, have high returns, and are safe. For investors looking to set aside their funds before they redirect them to new opportunities, money market accounts are perfect.
Treasury bills are popular money market instruments issued by governments. In this country, they are issued by the government of India and are set to mature after 91, 182, and 364 days. That makes them a good liquid short-term investment option. A point to note is that, unlike other short-term investment options, treasury bills are zero-coupon securities. Zero-coupon securities pay no interest but offer a return based on face value.
Investing in crypto assets is also a promising option for short-term investors. Cryptocurrencies benefit from fast market movements, offering investors the opportunity to generate significant returns.
Market cap is one way to pick a good cryptocurrency from a short-term investment perspective. However, the entry price for some of these popular cryptos is usually too high for small investors.
An alternative for short-term investors is to pick an altcoin with huge potential and low buy-in prices.