Short Term Investment - What is, Examples, & Benefits

This blog will cover a variety of topics, including what short-term investment is, how it operates in the banking industry, various examples of short-term investment, and much more.

Given below are the following topics we are going to discuss:

• What is Short-Term Investment?
• How Short-Term Investment Operates?
• Various Examples of Short-Term Investment
• Advantages of Short-Term Investment

What is Short-Term Investment?

Investors are constantly seeking places to put their money until they need it. Their preferred choice is a standard savings account. Yet, investors have a wide range of other short-term possibilities.

Short-Term is a type of investment where any investment strategy with a time period of less than five years is regarded as a Short-Term Investment. Short-term objectives are made to accomplish inevitable future events that cannot be avoided. 

For instance, your child is presently 16 years old and will want money for graduation in two years. These are all short-term objectives that call for short-term investments, such as purchasing your child a motorbike when he graduates or a luxury vehicle for your family three years from now.

You can postpone some of them, but not all of them. You must avoid taking any risks and be decisive if you want to accomplish particular goals in the near future. Capital protection and return on investment are the two main goals for investors using short-term funds. The optimal short-term investment strategy typically has an investment lifetime of less than a year.

Learn Real-World Skills to Kickstart Your Investment Banking Career!

Investment Banking Expert Training

Explore Program

How Short-Term Investment Operates?

Short-Term Investment can be used as a medium to keep your hard-earned money safe, and accessible, and can earn interest by using short-term investments as a source. Long-term investment, which is all about stability and expansion, is not the same as this. Thus, liquidity is the key advantage of short-term investment.

Although the risk associated with short-term investments varies depending on the investment you choose, they are often less dangerous. The profits you receive from such investments are often lower than those from long-term investments. 

For instance, if you invest in mutual funds for a little time, you will profit far less than someone who holds onto these assets for a long time before selling them. Similarly to this, other short-term investing choices don’t pay much interest, such as periodic deposits. 

Thus, don’t expect to make a lot of money from short-term high yield investments. Yet given the safety and accessibility you get from these expenditures, that is a fair price to pay.

Various Examples of Short-Term Investment 

Investors have several alternatives when it comes to short-term investments, including stocks, bonds, and cash. To have a solid understanding of the subject, let’s go over the following short-term investment example one at a time:

1. Saving Account

One of the most straightforward and secure methods to access your money is through a savings account. Earnings are not the primary factor in this situation; liquidity is. Banks only provide maximum rewards of 4% to 7% on savings accounts.

2. Liquid Funds

These mutual funds of a certain type invest in short-term government bonds and certificates of deposit. These investments are safe, so you are free to enter and depart whenever you choose. While the redemption takes around 2 days, try to avoid putting all of your emergency savings in them. One can expect around 4%-7% post-tax return on liquid fund investment.

3. Short-Term Funds

Securities with a maturity of one to three years are the focus of short-term funds. These funds are a little riskier than ultra-short-term and liquid funds since the maturity of the securities is greater. Taxes are levied similarly to other debt funds.

The minimal deposit period that banks will accept is seven days. As a result, a person wishing to park money for even a week might select a fixed deposit with a duration that suits their needs.

4. Recurring Deposits

This kind of secured investment is appropriate for people who would want to make regular investments rather than fixed-fee investments. You can utilize either postal RD or bank RD; typically, banks provide RD for tenures ranging from 6 months to 10 years. Moreover, interest earned on RD is taxed.

5. National Saving Certificate

If you’re certain that the target will be reached in precisely 5 years from now, you may also invest in the 5 years Postal NSC (National Saving Certificate). The interest will be taxable, but you are still eligible for a tax reduction under Section 80C of the Income Tax Act.

Advantages of Short-Term Investment

The ideal alternative for developing your money is a short-term investment because there are several benefits you can use if you invest in it:

1. Flexibility

Short-term investments are preferable to long-term investments due to their flexibility. Depending on the investment firm, short-term investments often provide an investment duration of less than a year.

2. Useful in Emergency

This advantage is closely related to the above advantage i.e. flexibility because short-term investments are flexible, you can withdraw the amount at any time, especially in an emergency. 

Many individuals believe that having cash on hand is the greatest option in an emergency since it is convenient. Yet, money cannot earn you interest. Short-term investments are therefore always preferable.

3. Faster Results

Compared to long-term investments, short-term investments offer speedier returns. Faster results imply observable outcomes. After only a few weeks or months of investment, you may start enjoying the rewards.

4. Suitable for a Beginner 

Short-term investing may be a good option for beginner investors. Long-term investments often carry higher risks in addition to lacking the many benefits mentioned above. Hence it is always advisable to start investing in the short term.

5. Diversification

One of the most significant advantages of short-term investment is diversification. This is so because there are several sorts of assets that you may invest in, including stocks, bonds, real estate, and more. 

To diversify your risk, you can also purchase these assets in smaller sums. You may diversify your portfolio as a result without spending a fortune.

Conclusion

Investing your money in short-term investments can be a better way to secure your financial future and can earn some quick profits in the investment banking sector. Taking an investment banking course can equip you with the knowledge and skills needed to make informed decisions. Nevertheless, it’s important to know that all investments are not equal. Thus, It is always advisable to do research before investing money and diversify your portfolio to minimize the risk.