1. Savings Account
Savings accounts are the most common and versatile short-term investment options. Debit cards linked with savings accounts are perhaps the best feature of savings account investments. However, if you are parking funds to be used later for specific payments, it is better to use other investment options.
Since a savings account is also used for the majority of expense payments, your lump sum amount may get affected unintentionally.
Rate of Return: Savings accounts in India pay an interest of 2% p.a. to 7% p.a.
2. Treasury Securities
Treasury securities or T-bills are government-backed short-term money-market instruments. The Reserve Bank of India (RBI) issues T-bills under its open market operations (OMO). These are zero-coupon bonds with maturities of 91, 184, or 364 days.
T-bills offer safety of capital and steady returns with less than one-year maturity. At the same time, you can also trade the bills in case you need money faster.
Rate of Return: ~ 7.5% p.a.
3. Fixed Deposits (FD)
Fixed deposits are one of the most popular safe investments available in India. The best part is that you can invest in FDs directly through your bank account. Thus, parking excess funds away for short durations becomes quite easy.
Nowadays, you can open FDs ranging from 7 days to up to 10 years. You can also open FDs at the nearest post office branches. Post office FDs offer comparable returns and zero TDS.
Rate of Return: 2.5% to 8% depending on the duration
4. Recurring Deposits (RD)
Recurring deposits are also traditional safe investments. With RDs you can invest small amounts regularly to build a large corpus. You can open RDs at your bank through your savings account or at a post office.
PORDs allow you to invest cash in small amounts and build a corpus in over 60 months.
Rate of Return: 4% - 8% depending on duration
5. Liquid Mutual Funds & Short-Term Funds:
Liquid mutual funds, ultra-short-term funds, or money market funds are mutual funds that are invested in short-term securities. Liquid mutual funds are great short-term investment options due to the following features:
If you want to gather higher returns over an unknown short period, liquid funds are the perfect investment option. The capital gain on withdrawals before 36 months of holding will be added to your taxable income.
Rate of Return: 2% to 6% based on your holding period.
6. Debt Mutual Funds
Debt mutual funds are the best investment option if you want to invest for less than five years but more than three years. Debt mutual funds offer market-linked variable returns. However, most debt funds can keep your capital safe despite volatility.
You need to invest for at least three years to benefit from long-term capital gain provisions. Also, most debt funds deduct exit load if you liquidate units before 36 months. So, you can avoid any such charges if you invest for more than 36 months.
Rate of Return: 6% - 9% p.a. depending on investment duration and fund type.
7. Corporate Deposits (CD):
Corporate deposits are considered riskier than FDs or debt mutual funds. However, they also offer a higher rate of return. You can invest in corporate deposits for varying durations.
CD exit rules are much like bank FDs and you may lose a part of your interest on early withdrawals.
Rate of Return: 6% - 12%, depending on the risk profile of the firm
National Savings Certificate (NSC)
National Savings Certificate is a 5-year deposit scheme which pays interest at the time of maturity. In the meantime, you can trade the certificate with other investors if you need urgent withdrawal.
Rate of Return: 6.8% (NSC VIII Issue w.e.f. 1st April 2020)
8. Equity Mutual Funds
You can invest in equity mutual funds for less than five years. However, given the volatility involved in equity markets, it is wiser to have a longer horizon in mind. Even though, equity funds may allow withdrawals after only 12 months of investments your capital may suffer from an early withdrawal.
The best mode of investing in equity funds is through SIP. Here you invest a fixed sum at regular intervals. SIP allows you to have a lower average cost of units than the market. Thus, it is easier for your units to be profitable.
Rate of Return: Variable based on market conditions and investment duration
9. Stocks, Commodities & Derivatives Market
Stocks, commodities and derivatives can be short-term investment plans with high returns. Investments in stocks, commodities or derivatives are not subject to a minimum holding period. Thus, you can get in and out anytime and use these investments as short-term options.
However, these investments carry significant risks and you should be careful while investing. So, unless your risk appetite allows you to invest in these options, you should stick to investments with more stable returns.
Rate of Return: Variable based on market conditions
The primary purpose of investing in any short-term instrument is to keep the capital safe and earn a possible interest on it. For example, when you create an emergency fund pool you want to invest only in the safest possible options.
For this purpose, you park the money into super savers, fixed deposits and liquid funds etc. However, you should never put your emergency funds in equity stocks, commodities and derivatives, even though they allow high liquidity.
