Best Short Term Investment Options – Where Should I Invest My Money?
“If you have more than 120 or 130 IQ points, you can afford to give the rest away. You don’t need an extraordinary intelligence to succeed as an investor”. –Warren Buffett
These wise words from an extraordinary investor Mr. Warren Buffett explain it all. You don’t need to be super intelligent to manage your investments fairly well. However, as a beginner, it is normal for you to ask where should I invest my money, whether for short term or long term investing goal.
Today’s market is flooded with various types of investing instruments. For new investors, the sheer number of choices makes the beginning of their investment journey much more daunting. However, would be able to make sound investment decisions if understand some of the basics. Considering the current volatile conditions in the market it is safer for individuals to invest in short term investment options.
What is Short Term Investment?
Short term may mean investment raging from few months to few years. Typically, financial instruments or assets which can be converted into cash within 1-3 years are known as short term investment securities.
This type of financial securities is usually highly liquid. Additionally, good short term investment securities act as a buffer in your investment portfolio. In absence of this buffer, you may run into a risk of liquidating your long term financial instrument for emergency situations.
In Addition to its obvious benefits, investments are necessarily made with the goal of receiving an income in return. The income refers to returns received in the form of dividends or interest paid in return for investing in corporate bonds or appreciation in initial capital etc. That is why investing appears to be a lucrative choice for investors rather than simply saving.
Things to Consider Before Making Investments
However, no investment is completely risk-free. Thus consider the following factors before making investments:
First, assess the objective of your investment. For example, are you planning to pay for college fees after 2-3 years or are you planning for a trip abroad? In both cases, you would want your capital to appreciate with time so that you will be in a much comfortable position financially at the end of the investment term. Thus your obvious choice would be short term investment options with high returns.
Personal Finance Map
Determine your risk appetite based on your age and income potential. For this, you may need some guidance from a finance professional. Choose the best short term investment optionbased on how much money you can invest and how much flexible are you based on the time frame.
It refers to how quickly an asset or security can be converted into cash. You must assess when and how quickly you will need your invested money back. If high liquidity is your priority then invest in short term investment securities.
If your rate of accumulation of assets is greater, then it is likely that your saving rate will significantly exceed the return you earn through the first year of investing. If not, you can increase how much you save each month in order to grow your overall investment corpus.
It is one of the methods of investment risk mitigation. It simply means you can invest in a number of different types of securities rather than putting all the money in one financial instrument. This way you minimize risks risk of losing all at once.
Following are the short term financial instruments you can choose to invest in once you assess all the above-mentioned factors and considerations.
Various Short Term Investment Options
High Yield Savings Account
Saving account allows you to park you earning in a risk-free way and earn interest on the accumulated corpus. However, the interest rate may vary over a period of time. Thus it ultimately affects your saving amount. On the other hand, this type of investment does not require regular monitoring of on your part. These instruments are comparatively very short term investment options but are almost risk-free.
Money Market Account
This type of account gives you high returns but the only shortfall is, you would be able to issue checks only six times in a month. Moreover, online banks allow higher APY (Annual Percentage Yield) on such accounts depending on the minimum balance and not based on the length of the investment.
These are the best investment options in India for short term as they indicate the responsibility of the Government of India. These instruments are issued on an auction basis to investors with certain denominations. The investment duration usually spans from 91 days to 364 days. Treasury bills are sold on discount as they do not have a specific interest rate.
Commercial Papers (CP)
It is an unsecured short term financial instrument issued by corporates for the purpose of raising funds necessary to fulfill their short term debt obligations or working capital requirements. Corporate entities can generate funds directly from the market by issuing commercial papers without having to borrow from banks. However, commercial papers can only be issued by corporate houses with exceptional credit scores, as these securities are not backed by any collateral. The maturity period generally ranges between 15 days to one year. At the time of maturity, the issuer must pay the full amount to an investor without any grace period.
Certificate of Deposit
It is also one of the money market instrument issued by banks to depositors indicating the existence of deposit with them. Under this arrangement, bank deposits can be transferred from one owner to another. The rate of the certificate of the deposit depends upon the interest rate available with the bank. They offer good returns to investors and are safe as well as to invest in.
Exchange-traded funds hold a basket of securities to be traded on an exchange. These funds are designed for the purpose of attracting individual investors and can be a good short term investment option. These funds provide flexibility and ease to diversify an investment portfolio.
Do Your Homework Before Investment
At times external influences tempt individuals to alter their investment strategies. However, before making any investment choices, make sure you do homework and consider all the risks involved, rather than only focusing on the returns.