A short-term investment is one that has a time horizon of fewer than five years. Short-term objectives are made to accomplish inevitable future events that cannot be avoided. You need a method that is safe, liquid, and provides returns above the rate of inflation when you park your money for a short period of time.
You must make wise investments to put your money to work for you in order to build wealth. Fortunately, there are several investment options available for you to choose from depending on your financial objectives, risk tolerance, and liquidity requirements. Let us discuss some of the major short term investment options.
Being prepared for emergencies is necessary for good financial judgement, and Covid-19 highlighted how crucial it is to have a sizable emergency fund. The corpus need to cover at least one year's worth of expenses. If you want to create a contingency corpus, you can invest your money in liquid funds. These funds have the potential to provide somewhat better returns than a savings account since they invest in money market securities with 91-day maturities.
Debt mutual funds, which are geared for extremely short-term debt investors, invest in debt securities with residual maturities ranging from six months to one year. In comparison to a bank FD, a debt fund will yield larger returns and be more tax-efficient. The risk of rising interest rates exists, although it is small given the extremely short residual maturities. In comparison to banks and money market funds, they provide much larger returns.
Money market mutual funds
These mutual fund offers have the lowest risk levels. Money market funds often invest in relatively short-term government securities with maturities of three months to a year, such as call money market, commercial paper, treasury bills, bank CDs, etc.. Compared to bank deposits, they are marginally more tax efficient.
Corporate bond funds
Major firms issue corporate bonds to finance their investments. They normally pay interest at regular times, possibly quarterly or twice a year, and are regarded as secure investments. Bond funds are assemblages of these corporate bonds from several businesses, typically spanning a variety of industries and business sizes. Due to the diversity, the return will not be significantly impacted by a bond that performs badly.
Certificate of deposits
Certificate of deposits or CDs are time deposits which require you to store the funds in the account for a certain amount of time, which can range from a few weeks to several years, depending on the maturity you choose. The bank will provide you a greater interest rate in return for the security of having this money in its vault. Also, if you cancel your certificate of deposit, or CD, before it matures, you won't be charged the usual cost by the bank.
Compared to longer-term investments like stocks or stock funds, short-term investments are often rather secure. However, be cautious to only invest in things you fully understand. If you're investing for a period of five years or less, your strategy should differ from that of someone investing for a period of decades.