If you want to grow your money then without keeping it idle in your bank account, you should invest it in various schemes. Investments can be long-term or short-term. The returns of long-term investments are not immediate. If you invest in land, for example, you will need to wait 10 to 15 years for the land price to increase significantly. We often have immediate needs like medical treatment expenses or kids’ college fees. So, always locking money in long-term investments is not a smart decision. You should have some short-term investments that you can cash out within a short time, usually within 1 to 3 years and sometimes even less than a year. You might not get as much return as long-term investments, but you will have access to your money whenever you need it.
How These Investments Work
Short-term investment is appropriate for both individuals and companies. For companies, two conditions must be met. First, the company must invest in stock or treasury bonds which are liquid, and second, the management should have the option to sell these within a short time. The goal of short-term investment is to protect the capital and generate a good return. Short-term investments are recorded on the company’s balance sheet if the cash position of the company is strong. In that case, the company will be investing in bonds, stocks, or other things to earn high interest.
Short-Term vs. Long-Term Investments
Short-term investments offer flexibility; you can cash out your money within a short time and then reinvest if you want to. You will also get good returns within this short time. You can cash out long-term investments before maturity, but in that case, you will get lower returns. Short-term investments are less risky as a low amount of money is invested per transaction. In long-term investments the risk is high; however, as the money is locked for a long time the investors expect that the risks will smooth out eventually. Long-term investments are appropriate for those who don’t require the money for any immediate purpose. Short-term investments can be helpful in case of emergencies.
Short-term investments diversify your portfolio, so increase equity and the amount of cash in hand. In short-term investments you can invest a very small amount as well, thus allowing people with lower income levels to invest as well. You can change your investment decisions with changes in market conditions in short-term investment. For example, if the market is steady, you can decide to invest and if it becomes volatile, take your money out after its maturity period. So, the control of your money is in your hands.
Best Short-Term Investments
There are plenty of options available for short-term investments. They vary according to the interest rate, maturity periods, riskiness, liquidity levels, and other factors. You should choose the right ones that match your financial goals. Here are some of the best short-term investments that you can consider.
1. Certificates Of Deposit (CDs)
Banks and credit unions provide certificates of deposit (CDs) at a high fixed interest rate. Your money will be locked up for several months to five years. If you withdraw the amount early then you will incur a penalty. They offer higher interest rates than savings accounts and money market funds. If you have a plan to go on a world tour and buy a new car or home, then you can deposit money here for some time and get good returns.
2. Corporate Bond Funds
These are debt securities issued by large companies to raise funds for different purposes. They are similar to a loan, that is the company will give back the money to the investor at a pre-decided maturity date and interest rate. These are not as secure as government bonds. Before investing here make sure the company you choose is in a strong financial position.
3. Corporate Stock
It is a company share that investors can buy and later get dividends on the stock. The stock’s value may rise or fall according to the company’s performance, market condition, or other macroeconomic factors. So, there is risk involved, but the return may be high. The stock market is often volatile, therefore you need to understand the market and manage your funds wisely. Alternatively, you can hire someone to look after your investment in stocks so that you don’t lose money when stock prices fall.
4. Hedge Fund
An alternative to corporate stock is hedge funds. For this, you need to be an accredited investor. You can put your money in different securities and use a hedging strategy to reduce the risk. They have lock-up periods from six months to more. Here you may have to invest in illiquid assets too so cashing out the money can take longer time.
5. Gold or Silver
This is appropriate for both short-term and long-term investments. The prices of gold and silver keep on fluctuating. You can buy and keep them until the prices become considerably high. By selling at that time you will earn a lot of profit. It is a safe investment as the price of gold and silver is increasing day by day.
6. Fixed Deposits
Fixed deposits are common short-term investments in many countries. You will get a fixed interest rate and your returns are guaranteed. You can lock in your money from 7 days to 10 years; the period varies from bank to bank. You can renew the scheme after the maturity date if you want to.
7. Savings Accounts
If you think that you can use your savings account to get your salary only then you are wrong. A savings account offers a good interest rate and your money will grow if you keep it here. However, its interest rate is lower than that of the fixed deposits and other schemes. You can choose a standard savings account or a high-yield savings account. High-yield savings accounts have a high minimum deposit amount and you will have to maintain a high minimum balance as well.
8. Money Market Funds
These are a type of mutual funds that offer high liquidity. They are low-risk short-term investment options and the return you will get is higher than the savings accounts. You can invest in different money market securities like short-term money market deposits, bank bills, overnight cash, and others.
9. Treasury Bills
Treasury bills come in three forms: T-bills, T-bonds, and T-notes. They are also low-risk short-term investments having different maturity periods like 3 months, 6 months, or 12 months. You can get some that are issued weekly. As these are government securities they are very safe. These are sold for less than the face value and after maturity, the investors will get the full face value. Government-issued bonds like bills, notes, and floating-rate notes are examples of treasury bills. You can cash them anytime.
10. Government Bond Funds
These are similar to corporate bonds, except that these are issued by the government. It is a low-risk investment and has lower interest rates. If you have these you will get exemption from state and local taxes. Some government bonds pay periodically which offers more flexibility. The government bond funds are used for good causes like infrastructure projects and domestic programs. So, you will have a good feeling investing your money here and indirectly you will be contributing to the various projects.
11. Roth IRA
It is a kind of retirement account. Here you will pay taxes when you deposit money on this account, but when you withdraw the money you won’t pay any tax. This is the opposite of the traditional IRA account when you pay the tax at the time of withdrawal. A Roth IRA is better than a traditional IRA because you pay the tax early and at the age of retirement you will have less financial burden. Generally, an IRA is a long-term investment, but if you maintain a Roth IRA at a brokerage firm, then it’s a short-term investment.
12. Post-Office Time Deposits
These are fixed deposits and are as safe as government bonds. You are guaranteed to get returns. It is a popular short-term investment scheme in many countries, especially in the remote and rural areas of the country. The tenure of this scheme is one, two, three, or five years. You will get the interest in your bank account every year. You can withdraw it early in case of emergency; however not before six months. The interest that you will earn from this scheme will be included in your income and you have to pay the tax accordingly.
13. Commercial Paper
This is issued by companies to finance inventories, payroll accounts payables, and other short-term liabilities. You will get a higher interest rate than that of the current market. However, it’s not very secure as it’s not supported by any collateral. The maturity of commercial paper is less than 9 months.
14. Banker’s Acceptances (BA)
These are short-term credit investments provided by non-financial organizations. These are as secure as the bank guarantees them. You will get them at an amount lower than the face value in secondary markets. These are time drafts that are used for financing imports and exports of goods. These are constantly being traded at secondary markets, so you can sell them at any time without being concerned about the maturity date.
15. Peer-To-Peer (P2P) Lending
Taking loans from another individual is called peer-to-peer (P2Q) lending. Today you will find many websites offering P2P lending services. You need to open an account and deposit money that will be used as loans. The loan applicants will receive the loan once they agree. You will get a higher interest rate than a savings account, however, the risk is high. You need to choose the applicant carefully.
If you are looking for low-risk, stable, and liquid options for growing your wealth then short-term investment is ideal. The good thing about this short-term investment is that you can take out your money anytime. It is a secure investment and the best place to keep your emergency fund. The type of short-term investment you choose should depend on your investment goals, like short-term savings, income generation, or emergency funds. The level of risk you are willing to tolerate must also be taken into consideration. If you want the low-risk option, then treasury bills or saving accounts are appropriate; for higher return and risk, short-term bonds or money market funds are preferable. The length of time for which you want to lock your money is also an important factor to consider before you invest your money. Even in some short-term investments, you will incur a penalty for withdrawing money before the maturity date. So, you should choose something that has the right balance between returns and liquidity.