Most wealth-building strategies would recommend staying invested for the long-term, and rightly so. It’s a fact that long-term investments are better-positioned to fetch expected returns beating inflation. However, sometimes you may need to invest for a shorter tenure (like 1 to 2 years) to meet crucial short-term financial goals.
That being said, it’s a fact that there aren’t many investment options for the short-term that get you great returns, especially when you consider the tax component on them. Despite the limitations, here are 3 good investment options that you’d do well to consider.
The good-old FDs have been an investment instrument of choice for countless investors who seek guaranteed returns on their idle savings without increasing the risk quotient. It’s no wonder they are a good investment option even for a short tenure like 1-2 years. Latest data compiled by Bankbazaar states that FD interest rates for 1-2 years tenure fall anywhere between 6.25 per cent to 8 per cent. And the rates are slightly higher for senior citizen depositors.
The other advantage is the ease of opening an FD account (most deposits can be opened in minutes through mobile banking applications without any paperwork) and clarity of returns. Also, contrary to popular belief, withdrawing an FD prematurely is still a viable option in the face of a financial emergency. Depending on your bank, an FD can be withdrawn before maturity after losing 1 per cent interest (so principal investment remains safe).
However, the downside to all FDs (apart from 5-year tax-savers) is marginal returns as all returns are taxable as per appropriate slab, except for up to Rs 50,000 returns for senior citizen depositors. As such, the tax-and-inflation-adjusted FD returns might not be enough to meet your financial goals. Yet, a safe way to garner moderate returns in a 1-2 years investment horizon.
Short-term investors who don’t have a lump sum fund to invest in FDs should consider recurring deposits, available at all major banks and even post offices. RDs are staggered investment plans where depositors can choose a tenure between 6 months to 10 years and earn a guaranteed 5.75 per cent to 7.5 per cent returns on regular deposits (up to 8.05 per cent for senior citizens, according to April 2019 data).
And while post-lock-in premature withdrawal is permitted after paying 1-2 per cent interest on the principal amount (no partial withdrawals, though), RDs can also act as collaterals when disbursing a loan. However, even RD returns are taxable, something that diminishes their value when further adjusted against inflation. It is a safe investment option nevertheless that can garner greater returns than a savings account.
Liquid mutual funds
The exit load-free liquid debt mutual funds are another investment option to park your surplus money for the short term. Since they do not have exit loads, you have the choice to withdraw funds as and when you want. These funds invest in various money market instruments like a certificate of deposits, treasury bills, commercial papers, and term deposits, and are considered less volatile and come with a maturity tenure of up to 91 days. Latest data by Value Research shows that liquid debt funds have on an average fetched 6.91 per cent returns in a 1-year tenure.
Do note that investments made in liquid debt funds for less than 3 years qualify as short-term capital gains which are added to your income and taxed according to the applicable slab. However, all mutual funds are linked to market performances, so due diligence is a must before making any investment decision.
The author is CEO, Bankbazaar.com