Monday, December 16, 2024
HomeMutual FundShort-Term Investment Options in India 2025

Short-Term Investment Options in India 2025


What are the short-term investment options in India? How can the available options be optimized? Which short-term investment option is best?

Before exploring the investment options at first let us have a clarity about few important aspects of short-term investment.

What do you mean by short-term?

It is more of a personal choice to define what is personal. However, in my view, if your time horizon is around less than 3-5 years, then you must consider it as short-term and stay away from equity investment. Equity is meant for long-term goals and that is also with proper asset allocation.

But for few short term means few days, few months or 1-2 years only. However, I feel exploring equity for less than 3-5 years period is risky.

What should be the purpose of short-term investment?

The purpose of short-term investment should be to PRESERVE the principal and seek returns similar to typical Bank FD rates. Never explore options where eye-catching returns are highlighted. I am not saying that it’s impossible; however, the probability of risking your principal may also increase in such risky investments.

Hence, never explore investment options that may erode your principal. Instead, since your requirement is short-term in nature, it is better to stick to safe products rather than chase returns.

Short-Term Investment Options in India 2025

Now let us look into the options available for us for such a short-term investment.

Bank Fixed Deposits or RDs – Bank Fixed Deposits (FDs) and Recurring Deposits (RDs) are simple in nature and easy to understand. Use FDs and RDs when you are sure about when you actually need the money. If your investable surplus is substantial, consider exploring 2 or 3 different banks rather than concentrating your exposure on a single bank. You can also look into sweep-in FDs if your bank offers them. If you are seeking a completely safe option, consider Post Office Term Deposits. However, avoid company FDs, NBFC FDs, or Small Finance Bank FDs. Such options may appear more attractive than normal FDs, but we should not assume that the risk is the same across all types of deposits. Remember that high returns always come with high risk. If you still wish to invest in small finance banks, do not invest more than Rs. 5 lakh in a single small finance bank. Please refer to my earlier post titled “Is it Safe to Invest in Small Finance Bank Fixed Deposits?

Overnight Funds – These are the safest debt mutual fund products. Ideally one can use Overnight funds when the requirement is one week. You can choose any mutual fund company’s overnight fund. No such research is required.

Liquid Funds – Liquid Funds are more suitable when the need for funds arises within a few months. If you have a clear timeline for when you will need the money, traditional Bank Fixed Deposits (FDs) are advisable. There is no need to complicate your decision between Overnight Funds and Liquid Funds if your requirements are straightforward. However, if you are uncertain about the timing of your financial needs within a short period, either Overnight Funds or Liquid Funds can be utilized. If you possess a sweep-in Bank FD, it is highly recommended to prioritize this option over the aforementioned categories of debt funds.

I have written a comparison of Overnight Funds Vs Liquid Funds in detail. Refer to the post “Liquid Funds Vs Overnight Funds Difference – When to use them?“.

Arbitrage Funds – You can explore Arbitrage Funds if your holding period is more than a year. As the Arbitrage Funds taxation is like equity mutual funds, they are more tax efficient than other short-term options. However, do note that during market volatility or when there is no arbitrage opportunity available in the market, arbitrage funds may generate negative returns for few months. Hence, use them cautiously and ideally should be used for more than 1 year or so investment period. (Refer to my earlier post on this “Can Arbitrage Funds give negative returns?“.

Ultra Short-Term Debt Funds – Here, the fund manager has a mandate to invest in debt and money market securities such that the Macaulay Duration of the scheme’s portfolio is 3 to 6 months. Compared to other categories of debt funds, it is safer in terms of volatility but slightly riskier than overnight funds and liquid funds. However, in ultra-short-term debt funds, you may face an additional risk of default or downgrade if the fund manager invests in low-rated bonds. Hence, just because the fund invests in 3- to 6-month duration securities does not mean it is risk-free. You must examine the portfolio before making a decision. Otherwise, if you encounter any default or downgrade risk during your holding period, it may jeopardize your short-term funding goals.

Money Market Funds – It is an open-ended debt fund where the fund manager has a mandate to invest in money market instruments with a maturity period of up to 1 year. Money market instruments include certificates of deposit, commercial papers, commercial bills, or treasury bills with maturities within 1 year. In the case of Money Market Funds, you have clarity regarding the maturity and type of securities in which the fund manager must invest. Hence, Money Market Funds provide more clarity than ultra-short-term debt funds.

Do note that exploring debt funds over Bank FDs is advantageous, as there is no concept of TDS in mutual funds. Due to this, even though the taxation is the same, post-tax returns in debt mutual funds may be slightly higher. However, as I mentioned, you must have clarity on which debt fund to choose. Never choose debt funds based solely on past returns; otherwise, you may end up taking high risks.

For Unbiased Advice Subscribe To Our Fixed Fee Only Financial Planning Service

RELATED ARTICLES

LEAVE A REPLY

Please enter your comment!
Please enter your name here

- Advertisment -
Google search engine

Most Popular

Recent Comments