What Are Short-term Investments? 5 Types Of Short-Term Investments And How They Work

Short-term investments are investments with a tenure of 5 years or lesser and are easy to liquidate in case of an emergency.

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Source: on Unsplash

What Are Short-term Investments?

While planning your finances, we always tend to keep a small amount aside for short-term investments. These are investments with a tenure of 5 years or lesser and are often easy to liquidate in case of an emergency. 

Such short-term investment instruments are usually used to park excess funds for a short period. This is due to the fact that they are highly liquid in nature and hence can be used in the case of any future expenses. These investment instruments have a low risk as compared to long-term investment instruments and hence give predictable returns.

Types Of Short-term Investments

Some of the most popular short-term investment instruments are savings accounts, fixed deposits, recurring deposits, post office term deposits, and the National Savings Certificate. Let’s take a closer look at each of these 5 types of short-term instruments and understand how they work.

Savings Bank Account

A savings bank account is arguably one of the most popular investment options and is preferred by most of us. This is because it is easy and convenient to hold and liquidate cash at any time from a savings account. In a savings account, the investor can deposit money and earn interest on the deposited amount. These accounts are highly liquid, and you can withdraw your deposited money from the account whenever you want to. The interest rates for savings accounts may vary for each bank and would also depend on the type of savings account. 

Take a look at the savings account interest rates offered by some of the top banks in India.

Fixed Deposits (FDs)

Fixed deposits are also very popular for short-term investments as they are one of the safest investment instruments and also offer guaranteed returns. The interest rates on FDs are fixed throughout the investment tenure and do not change with market movements. The FD interest rate may range from 3% to 8% for deposits for varying tenures. Most banks also offer preferential FD rates for senior citizens.

Investors can open a bank FD with a tenure ranging from 7 days to 10 years. These FDs can also be renewed once they mature. Moreover, banks also allow the premature withdrawal of FDs with a minimal penalty. Hence, FDs are considered to be highly liquid short-term instruments.

Recurring Deposits (RDs)

Another short-term investment option offered by banks is recurring deposits. Here, the bank allows investors to invest in the RD on a monthly basis for a fixed tenure. Recurring deposits offer benefits like low risk guaranteed returns, liquidity, and flexibility. The interest rates on RDs may vary between different banks and are also revised from time to time. 

The tenure for recurring deposits ranges between 6 months to 10 years. However, these deposits usually have a lock-in period of 1 month. 

Post Office Term Deposits

Post office term deposits or post office fixed deposits are traditional savings schemes offered by the Indian Postal Services. These deposits are similar to bank fixed deposits. Investors can deposit a lump sum amount in these term deposits for a fixed period of time and earn guaranteed returns. The interest rate on post office fixed deposits ranges between 5.5%-6.7%. The tenure for post office fixed deposits ranges between 1 year to 5 years.

Like banks, the post office also allows premature withdrawal of term deposits. However, they will charge a penalty of 1% for premature withdrawal. Investors can also take a loan against their post office fixed deposits. 

National Savings Certificate (NSC)

The National Savings Certificate is an initiative by the Government of India to encourage small savings. Since this investment instrument is backed by the government, the returns offered by the NSC are guaranteed. Currently, the National Savings Certificate scheme offers a fixed interest rate of 6.8% per annum. The NSC has a fixed tenure of 5 years. The minimum investment amount for this scheme is ₹1,000 and thereafter in multiples of ₹100. However, the NSC is not highly liquid as it does not allow premature withdrawals. 

Know more about the National Savings Certificate.