The frenzy to accumulate as much as possible starts from ants and ends with humans. We live a life building ground for our next step. Finance planning has taken major portion of your brain’s activity, not to mention the stress lines on your forehead and premature grey along your hairline. There are two types of Investment -Short term and long term. Standing at the fork of these roads, we ponder over the lengthy mundane policy guidelines looking for a helpline, a simple sentence which conveys a simpler idea for smart and safe investment.To do a smart investment here we discuss on the Pros and cons of Short term Investment Plans.
Smart financing is trending, and lack of patience and trust drives people to save somewhere safe and solid. Savings are done by investing your cash in some form that would yield returns/additional benefits- monetary or otherwise. There are different forms of investments, but the ones that all of us are clearly interested and working towards is how to reap what you sow in very less time. It means everyone is interested in short term investment plans.
What is Short term investment Plans?
In a not so professional-banker-style, it is to simply put away your resources or assets, which we will very cleverly refer to as capital ,to good use (by not spending it), for a span of few years (typically 1-3 years or less, in fact, it starts from 3 months onwards). It is not an investment until you get back more than what you have put in. So, that sums up our definition for a short term investment. Preserving your assets to ensure its safety and gain additional benefits on return.
Still if it is not clear here it is in most simple words. Here is a more polished short investment definition.
Short Term Investments as the name itself will define it that it is short term ie) mostly investments made for short period of time. It is part of certain account of the present assets of some company’s current balance sheet usually. Short term investment plans are made for avoiding risk in the capital and it is mostly aimed to get converted to cash within an year.
- It meets 2 requirements where first and foremost thing the asset which we have kept as short term investment should be easily convertible to cash .
Example: Stock price of a company will be attracted by investors to have a share of it.
- Second requirement is that asset should be easily sold or convert to cash within a period of 3 to 12 months.
What makes short term investment so attractive?
Primarily, I would say, Need. The necessity to use the money in near future drives this kind of investment. Why is it so desirable?
- The benefits of short term investment is that, firstly, you can break open your piggy bank sooner than later. The tenure for which the investment is made is short, ensuring low risk and faster access to your assets.
- Secondly, the possibility of losing your investment is low. Short term investments generally are low risk investments given the time period and security (most of the available schemes). The idea behind investments of these kinds are to retain your assets more than multiply.
Top Short Term Investment Plans
So given that there are lots of investment schemes available, how do we choose the best? And what are the available choices. Here is the list of best short term investments with their pros and cons involved in each of them.
If you have a problem with withholding cash and you want to get away from it without getting rid of it, fixed deposit is one such good short term investment plans.
- A guaranteed investment :
No risk involved. The return of your investment is certain.
- No temptation:
Idea of fixed deposit is to keep funds from being used for a stipulated period. Most banks do not encourage premature withdrawal (usually charged with a fee). This ensures the safety of the investment from self’s squanders.
- Flexibility of schemes:
Money can be invested from 1 month or for 5 years depending on the investor’s convenience.
- Fixed rate of interest:
Fixed deposit ensures your cash remains safe but what it does not offer is
- Higher returns :
The returns at the end of tenure may/may not be higher than that of a savings account but it is not significantly high.
- Low risk:
May not be as fruitful as perhaps an investment in stock market or gold.
- Not much of a tax benefit.
So fixed deposit is a guaranteed Short term Investment Plans.
Short term debt funds
These schemes are basically mutual funds similar to FD in terms of the interest. MIP (monthly income plan), liquid funds, stocks and shares all come under debt funds.
The advantage of short term debt funds over FD is tax benefits. This means the returns at the end of your stipulated period is more than what you receive from an FD.
A typical investment in India where purchasing gold is considered a status quo and an investment. The idea behind assets in form of Gold is because of its high value in times of need. Considered to have highest resale value and continuous increase in price, this is one of the most preferred form of investment.
Having said that, ornamental gold is not as much an investment as one expects.
- Taxes and Taxes:
On purchase, additional bracket in your bill comprises of VAT, wastage, sales tax, making charges, which amount to a significant sum in the total bill. This is not considered during an exchange/resell. That is, the value of your gold is minus the amount you spent on previously mentioned categories.
- Good for only updating to latest designs:
The value of resale gold is not entirely taken. There is a 6-7% decline in the rate of resale gold and cashing it instead of exchange further reduces its value to about 10%
Physical storage of gold is not possible due to fear of burglary. In case these are preserved in bank lockers, a stipulated amount goes into maintaining them.
- Wastage & Impurity:
Extensive design requires extensive impurity. Mixing of other metals with gold for tensile strength is not an uncommon knowledge but the impurity matters when it is tested for sale. The amount of gold wasted (gold dust) for making these intricate designs are unaccounted for yet paid for. So end up paying for Gold more than it is worth.
- Tax reduction:
Investment in gold does not waiver your taxes as compared to other investment schemes that influence/reduce your Taxes. Lesser ITR, I say!
The demand in gold has taken a massive dip many a times in past few years. This can happen in the future too. Unless you are buying gold, such conditions may not be favorable if you are trying to sell them.
But, as mentioned, in case of dire needs, Gold can always be sold, mortgaged or exchanged at any point of time, making it a suitable investment.
Yet another common form of investment is savings account. The idea is simple and safe, every drop makes an ocean; a very famous dialog in our household every time I splurge on something.
- Readymade withdrawal (ATM) and deposit of cash.
- Account book becomes an additional identity proof
- Quick transfer of money to other account.
- Internet transactions.
- Benefits on reaching prescribed goals set by particular bank.
But what you may not get on a savings account is listed as follows.
- Low interest rates:
The growth of your investment is almost negligible.
Each bank has a limit on the amount of customer’s deposit. If your savings exceed their limit, their insurance may not cover the rest of the amount.
- And yes, the most obvious reason being, you will want to spend them. Given the easy access, it won’t be a tough job to do either.
- Some banks have minimum balance maintenance. If the deposit/investment falls below their threshold, penalties are charged against the account holder, usually a certain amount.
If you want to make a monthly saving but with better interest rates, recurring deposit is one of the ideal schemes available.
- Deposit amount starts from as low as 500 upward
- Fixed monthly investments.
- Flexible duration: from 7 days to years as desired.
- It has fixed rate of interest which is slightly better than savings account.
Recurring deposits means periodic deposits. What may pose as constraints in recurring deposit are:
- Punctual deposition: Money has to be deposited to your recurring account on time without fail, defaulting can cause penalty
- Premature withdrawals are possible but some banks charge a fee.
- No tax benefit.
- Once fixed on the deposit money, it cannot be changed.
- Low interest rates.
Monthly Income Schemes
Again counted to be a secured form of investing your assets for a short (optional) period. Monthly incomes schemes are offered by banks as well as post offices. MIS in post office is preferred over banks because of the following advantages:
- Interest rate is good compared to fixed, recurring or saving account. Typically it is 8.5%.
- Maturity period is for 5 years. So your investment stays safe for the period of time, growing.
- A pre-closure facility is available after a year of opening the account but before 3 years.
- It provides a monthly interest that can be credited to your account.
- This interest in turn can be used as a source for recurring deposit or used for daily purpose.
- These deposits are exempt from wealth tax.
- The MIS can be opened by a single individual or 2-3 people together or for a minor through a guardian.
All this makes it ideal short term investment plans for many .
Given the interest rates are higher compared to other kind of deposits we have discussed so far, these deposits also come with some common limitations like
- No tax benefit
- Deduction of 1% if the account is closed prematurely after 3 years.
- Limit in investment- 4.5 lakhs per individual and 9 lakhs for joint account.
- Non-Indian resident is not allowed this investment scheme.
- Minors have a deposit limit of only 3 lakhs
The MIS schemes offered by banks and private financiers have longer maturity periods and is more a question of security of your investment.
PPF is another vital short term investment diligently followed by the working class people. The benefits reaped from PPF are as follows:
- No eligibility for opening the account. Opening a Public Provident Fund is a simple process and there are pre-requisites to be met for the same.
- The savings cannot be withdrawn and has specific time period for which it has to be maintained- ensures the investment remains unspent.
- Good rate of interest. An interest rate of 8.7% is applicable per annum on PPF.
- Tax exemption. This is one of the major reasons why PPF is more popular investment option. The annual investment to PPF and the interest earned out of are all exempted from your income tax.
- Any amount can be deposited to your account. There is no fixed amount.
- A loan or pre mature withdrawal from your PPF is possible.
- It is also exempted from debt, liability and wealth tax.
- A sure form of investment, the amount deposited remains safe.
- This account, like MIS, can be opened for minors too.
If you look for tax exemption then this is the best Short term Investment Plans for those who want tax exemption.
Though the benefits reaped are high, PPF investments come with clauses like –
- Money cannot be withdrawn from the account until 7th year of opening your PPF account.
- Joint accounts are not possible.
- NRI (Nonresident of India) cannot have a PPF account.
- Maximum investment cannot exceed 1.5 lakhs.
- Investments can be made only 12 times in a fiscal year, much like a recurring account.
- Most companies (public and private sector) make mandatory providential fund savings, which is no different from PPF. They even have a VPF (voluntary providential fund) open for employees who wish to make additional contribution to their savings.
These are not just some of the short term investment schemes available but also most preferred ones in India. The goal behind a short term investment is to save the capital rather than multiply it. More than looking at the cons of a scheme, the nature of the scheme that would suit one’s needs should be analyzed. Read through the policy and guidelines, analyze different schemes available and the benefits, opt the one that suits the best.
Draw a financial roadmap
Form an idea as to how to much to invest, and for how long to invest. Consider your immediate and future needs and decide on the term of investment and then pick your ideal Short term Investment Plans.
Read through current affairs: Be aware of the shift in market, in terms of value of gold, stocks and shares, their growth.
Analyze Risk: How much to invest is the question.
From the different schemes available, consider the amount of money you are ready to invest and the kind of investment you are ready make based on the risk involved and the returns.
Cash at hand: Always make a plan B. No matter how low risk it is, having a backup is good as far as money is concerned. Invest your money in different schemes and ensure there is always some emergency funds at hand for unpredictable circumstances.
Financial Advisor : They can do the ground work for you and help you make a smart investment. Their insights on not just investment, but taxation and tax efficiency helps make a better financial plan.
Having read the whole article, do not make a decision. Instead, collect the knowledge acquired and talk to a financial advisor. They do not have a degree in finance for no reason.End of the day, ensure you do not get into any shady business, caught up in the need for investment.So go through it well and find your best Short term Investment Plans.