Today, it is imperative to allocate your accumulated funds in the best manner.
On one hand, some people prefer saving; whereas there are those who prefer investing their funds. There are two kinds of investment — short-term investment and long-term investment. Here we will explore the types of short-term investment options available in the market.
Short-term investment offers better liquidity as the lock-in period is lesser than a long-term investment. A short-term investment lasts for a year or lesser. Seasoned investors usually prefer short-term investment as they provide better liquidity due to the shorter lock-in period. The returns on this type of investments are mostly tangible but directed at different end goals.
There is a myriad of short-term investment options available in the market. The products can be divided into two broad categories — one, yielding market-linked return and two, yielding fixed income.
Market-linked products involve debt mutual fund schemes with an average time of the underlying securities being lesser than 12 months. Some of the short-term market-linked investments are money market funds, liquid funds, and ultra-short funds.
Investment products with ranging from a tenure of 7 days to 12 months come under fixed-income investments. Some popular fixed-income products for short-term investment are post office deposit, company deposit, fixed deposit, and so on.
Here’s a glance at each with respect to liquidity, returns, taxation, and tenure.
Post Office Deposit
Tenure: The tenure for investing in post office deposit can be for 1, 2, 3, and 5 years.
Liquidity: Interest payments in post office deposits are yearly. One cannot withdraw money before the completion of six months. Withdrawal can be done post six months, but the interest received in such an event will be at a lesser rate.
Returns: Assured and fixed returns are provided after the investment is made with a sovereign guarantee for the entire tenure. For a shorter period, one can invest in a year-long deposit where the interest is calculated every quarter but is payable annually.
Taxation: The interest earned is added to the income, and the tax is calculated as per the income slab.
Company Fixed Deposit
Tenure: Company deposits carry a higher risk as they are unsecured deposits. The depositor has the final right on the company assets in case of a default. Both non-banking finance companies (NBFC) and manufacturing companies issue deposits but only the latter provide the option of short-term deposit. The company deposits provided by NBFC have a tenure of more than a year.
Liquidity: Company deposit allows early exit, but it depends on the company’s discretion to honour it. Before applying for surrender, the company levies penalties depending upon the tenure of the deposit.
Return: Company deposit provides interest higher than FDs, but they come with the added risk of losing the entire principal amount even if they come with higher ratings. A person can opt for monthly, quarterly, half-yearly, yearly or the cumulative interest option depending upon the need. Currently, most company deposits are extending around 7.5% per annum.
Taxation: The interest earned is added to the income of the person, followed by the calculation of tax according to the person’s income slab. TDS will be deducted from the company if the interest earned is more than Rs 5,000 a year across all branches of the company.
Bank Fixed Deposits
Tenure: One of the safest instruments of short-term investment is a bank FD. They come with several tenures ranging from 7 days, 30 days, 40 days, a year, or even up to 10 years. The duration of a deposit depends on different banks. In case, there is no need for funds, they can be reinvested by renewing these deposits on maturity. As per the rules laid down by deposit insurance and credit guarantee corporation (DICGC), each depositor in a bank is insured up to Rs 1 lakh for both principal and interest amounts. The facility of applying for FDs online is also available by most of the banks.
Liquidity: An investor can spread the amount across different maturities by ‘laddering’ as some banks do not allow premature withdrawal on their deposits. Apart from managing the reinvestment risk, it also offers liquidity to funds. FDs can also be invested for a longer time and can also be withdrawn early by bearing a penalty.
Returns: Depending on the requirement, one can choose from various plans like monthly, quarterly, half-yearly, yearly or cumulative interest plan. Banks align the interest they offer as per the repo rate provided by the Reserve Bank of India (RBI). As of now, it stands at 6.5% per annum for 12 months or above tenure. An additional 0.5% is given to senior citizen on their deposits.
Taxation: The interest earned is added to the income of the person, followed by the calculation of tax according to the person’s income slab. The bank charges a tax deduction at source (TDS) if the interest earned for a year is beyond Rs 10,000 across all branches of the bank.
All the above-mentioned options require investment to be made in one go, i.e., as a lump sum amount. A person can opt for a bank’s recurring deposit (RD) if the goal is to make regular short-term investments, say for 6,9, or 12 months. With RD investing in regular intervals is necessary for a specific period. After maturation of the amount,
the investor will receive a lump sum amount. The option of investing online is made available by most of the banks.
Tenure: The tenure of RD run in the multiple of 3 months, starting from as low as 6 months and up to 10 years.
Liquidity: Most RDs have a lock-in period of at least a month. In case a person needs to withdraw their money before a month, the bank only returns the principal amount without interest. If a person withdraws money before the maturation of the RD, interest will be calculated on the deposit’s applicable rate.
Returns: The rate of interest for RDs is the same as a regular bank FD. Presently, the interest rate is at 6.5% per annum for a tenure of 12 months or above. The calculation of interest starts as soon as the first instalment is made.
Taxation: Addition of the interest earned is made to the income and tax is calculated as per the income slab. TDS will be deducted in case the earned interest is more Rs 10,000 a year (including interest on bank deposits) across all branches of the bank.
There are four types of debt funds which are used to park short-term funds with the maturity period of not more than 12 months.
Liquid Funds: Investment on debt and money market securities with a maturity period of up to 91 days on the underlying securities qualify as liquid funds.
Ultra-short-term duration: Investments in debt and money market instruments with a maturity period between 3 months and 6 months on the underlying securities qualifies as ultra-short-term funds.
Low duration fund: Investments in debt and money market instruments with a maturity period between 6 months and 12 months on the underlying securities qualifies as low duration funds.
Money market fund: Investments in debt and money market instruments with a maturity period of up to one year on the underlying securities qualifies as money market funds.
Liquidity: The units can be redeemed quickly as the liquidity is high in these funds.
Returns: Returns are neither assured nor fixed on these investments. As of now, one can earn around 7% annually. For maximum results, it is advisable to match your investment limit with the maturities of underlying securities of these funds and then invest.
Taxation: Addition of the interest earned under 36 months of holding them are added to the income and tax is calculated as per the income slab. Gains which go beyond 36 months are taxed 20% post-indexation.
Invoice discounting is a practice where a business raises funds against their unpaid invoices to meet their working capital needs. The investors on the platform purchase these deals. On the completion of the tenure, the investors receive the principal amount along with interest on the deals.
Tenure: The tenure for investing in invoice discounting is usually between 30 to 90 days.
Liquidity: The invested amount can be received on or before the maturity date depending upon the business which has raised the invoice.
Returns: Returns on the investments made on invoice discounting are usually high. Above market returns ranging from 12-20% APR are provided by some invoice discounting platforms.
Taxation: Addition of the interest earned is made to the income and tax is calculated as per the income slab.
The Final Choice
One should not overlook post-tax returns if the requirement is to invest only for a short term. Calculation of tax is done based on the income earned which is added to one’s total income in that financial year.
Basing your decision on safety and liquidity for your investment rather than adding on the returns is something one should look for while looking for short-term investment options.