Short-term Investment - Meaning, How They Work, and Examples

Short-term investment meaning refers to investments made to achieve financial goals within a short period, typically ranging from a few months to a couple of years.. Short term investment examples include liquid funds, short-term debt funds, recurring deposits, and treasury bills.

Short-term goals are those that are expected to occur or be fulfilled in the near future. Short-term investments are the usual preferred mode when it comes to meeting short-term goals. Such investment options are classified as types of short term investments which have a tenure of 3-5 years.

Short-term investment options consist of marketable securities that can easily be converted into cash in hand. These securities can be debt instruments or equity, or a mix of both.

When it comes to fulfilling short-term goals, easy liquidation of funds is an important criterion; these funds are necessary to meet expected expenses.

Do note that since time is of the essence, short-term investments, by a rule of thumb, need to be less risky than long-term investment options. This also means that short-term investments usually have a short tenure and thus tend to generate predictable returns. These are often best short term investment plans for those looking for safety and liquidity.

Short-term investments are designed in such a way that they safeguard the principal amount while generating returns; that can be converted into usable funds after a few years. This is one of the primary benefits of short term investments. That they are highly liquid, and you can get your money quickly when you need it.

While short-term investment plans contain lower risk than long-term investments, they may not provide higher returns compared to long-term investments. Also, when you invest for the short-term, your choice bouquet is limited to only certain types of short term investments.

Good short-time investments will contain a few major attributes.

• The minimum investment size shall be reasonable. This means you can start an investment with as less as Rs 500
• Good short-term investments shall offer you convenience while opening and closing.
• They shall offer safety of capital/principal and can offer relatively decent returns.
• Best short term investment plans with high returns invest your funds in safe, marketable securities that can be liquidated quickly.
• A good short-term investment shall not burden you with high costs/charges.

While there is no perfect time to start investing, here are a few tips to invest:

• Start by defining your goals. You should think about your financial goals and break them down into categories based on the available time frame or time you can allocate to achieving them.
• Since their goals are short-term in nature, it makes sense to consider short-term investments to achieve them. Because of the paucity of time and lower risk appetite with regard to short-term investment, it is important to make the right investment.
• Understand the rate of returns. Expect a reasonable rate of return that beats inflation. Keep your return expectations grounded to have a smooth short-term investing experience. Returns alone should not guide your short-term investment options. Instead, capital protection should be the foundation.

A traditional favourite, savings accounts offer one of the easiest and safest ways to save and invest your money in terms of short-time investments. The main motive in savings accounts is liquidity. Depending on the bank you may receive anywhere between 2 percent to 7 percent annual returns from savings accounts. Of course, every bank has its terms and conditions and the returns may vary based on them.

An emerging choice for many, liquid funds are becoming popular short term investment examples. Liquid funds invest your money in short-term government certificates and securities of deposits. This is essentially a place to keep your emergency funds. Money is accessible 24X7, and it can take just a few days to redeem your short-term investments. Returns from liquid funds are subject to market risks and are annualized and pre-tax on liquid funds investment.

A notch above liquid funds, short-term funds put your money in securities that mature in 1-3 years. These funds are a little riskier than liquid funds. In market parlance, they are called ultra-short-duration term funds. If you choose to invest in short-term funds, understand that these are market-linked schemes and like any other market-linked scheme, returns are not guaranteed.

This type of short-term investment is suitable for those who don't want to invest in a lump sum. Recurring deposits allow you to invest small sums every month. You have two options here: Postal Office RD or Bank RD. Pre-tax return on recurring deposits revolves in a wide range and depends on the selected bank or Post Office interest rate being offered over the period.

This is a Post Office product and is offered for a tenure of 5 years. Such a short-term investment is suitable if your target goal is exactly 5 years away. While investing in NSC, you can claim tax benefits under Section 80C. It currently offers a 7 percent pre-tax return.

These mutual funds offer additional tax efficiency if held for more than a year. They fall into the hybrid fund category. Historical rates of return show 4-6.5 percent pre-tax return.

Coming with a lock-in period and like bank FDs, Fixed Maturity Plans offer more tax efficiency, and there can be some outlook on returns that are entirely market-linked in nature. These invest in reasonably safe debt instruments, not putting your capital at risk.