Investing for short term becomes inevitable for two reasons. First, you are yet to figure your long term investment plan. Second, you have a short term goal say payment of your daughter’s school fee six months from now. Whatever be the case, the individual has to figure out the investment option. Moreover the idea of picking something that is ‘hot’ makes no sense. For example, if you pick up an equity fund with a less than one year investment time frame, then you are exposing yourself to market volatility. There is scope of a capital loss too. With a view to serve the twin objective of minimum risk and decent return here are five investment options to explore if you are keen to invest for a year or less.

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Fixed deposits

“If you are looking for assured returns and your marginal rate of income tax is low, then fixed deposits make a lot of sense as short term investments,” says Joydeep Sen, Founder of Wiseinvestor.in. Consider investing in a fixed deposit issued by a public sector bank if you are looking for absolute safety.

If you want a higher returns, the options such as fixed deposits from private sector banks and companies come into the picture, albeit with extra risk.

Do check the premature withdrawal clauses before you sign above the dotted line.

Recurring deposits

If your saving monthly for a short term goal, you may want to opt for a recurring deposits. It allows you to save a fixed sum each month at a pre-decided rate of interest each month. After you pay the pre-decided number of instalments, you get the sum back with the interest. This works for those who are keen to save as they earn.

Liquid funds

If you fall in the high income tax slab such as 30 percent and above, liquid funds’ dividend option makes sense.

These mutual fund schemes invest in instruments that mature in less than 90 days. In the past three months, liquid funds as a category has given absolute returns of 1.7 percent. These funds allow you to buy and sell units at a short notice. As the fund managers’ focus is on liquidity and capital preservation, there may not be much risk involved, if you go with large funds. “The possibility of earning more than your saving bank account returns without compromising on liquidity makes these funds a great short term investment option” says Jitendra PS Solanki, Founder and Chief Financial Planner of JS Financial Advisors.

The interest rate risk is minimal in these funds as the entire portfolio is invested in instruments maturing in the short term. The Monetary Policy Committee has raised rates twice in CY18 and there are expectations of further hikes in the near future. In a rising interest rates environment, one should not undermine interest rate risk.

Short term bond funds

As the name suggests, these bond funds invest in bonds maturing in 1-3 years. Given the interest rate and credit risks faced by investors in these schemes, investors with a penchant for risk should opt for these schemes.

“These funds offer a diversified portfolio of bonds and other debt instruments and hence the credit risk is reduced to that extent,” says Sen. You may also want to invest in a scheme that runs a portfolio of bonds maturing in a year. This will reduce the interest rate risk to a greater extent. Short term bond funds as a category has returned 1.9 percent in the past three months.

Arbitrage funds

Investments in all these options mentioned earlier are not tax efficient, especially when they are held for less than one year. If you are keen to hold for little more than a year, consider the growth option of an arbitrage fund. The capital gains so earned on the investments held for more than a year in arbitrage funds are taxed at 10 percent.

For the uninitiated, these funds buy shares in the cash market and sell them immediately in the futures market. The fund manager’s aim is to pocket the price differential. The funds are not affected by stock market movements. Arbitrage funds have earned 5.4 percent over the past one year.

Do note that the objective of carrying out a short term investments is not to earn top of the table returns, but to fulfil some financial objective.

Disclaimer: The views and investment tips expressed by investment experts are their own and not that of the website or its management. Users are advised to check with certified experts before taking any investment decisions.

Source: Moneycontrol.com