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Short term investment options for good returns
Contributed by RKR on 4/24/2013 11:10:41 AM

Short Term Investment Options

There are many short-term investment options available in the market. The choice of option should depend upon factors such as risk appetite, liquidity situation, investment quantum etc. Let us check various short term investment options available:

Options if you are a very conservative Investors:

Fixed Deposits: Interest rates are near their high levels. Smaller private sector banks normally offer little higher interest rates. Fixed Deposit interest rates may vary from 8 to 10% depending on type of bank.  This also depends on the period of investment. Few private sector companies also offer Fixed deposit options but many of them may be little risky unless it has some good rating from a good rating agency. Thus check on this before investing. Though they will give you better interest rates. 

Recurring deposits: Banks and post office offer this facility. The interest rates on recurring deposits are higher than savings accounts and almost similar to those on FDs and are available for 6-24 months tenure. Recurring deposits are useful for accumulating funds for special goals e.g. planning a vacation worth Rs. 75,000 after 9 months, you can do so by creating a 9 month recurring deposit putting Rs 8,000 every month.

Liquid/ Short Term Funds: This is a good way of investing in short term and interest return vary between 6 to 10%. The investment may be for one day to any period you want ( usually for few months). Moreover, there is no penalty for early encashment and fund can be en-cashed within two days. It is good to approach a bank ( HDFC Bank, Axis Bank, ICICI Bank etc.) for this though many finance companies like Reliance Capital, IIFL etc. also provide this service. Few mutual funds also offer this option with easy exit policy.

Options if you are an investor with average risk appetite: 

Fixed maturity plans (FMPs) & monthly income plans (MIPs): FMPs, MIPs are debt focused plans that primarily invest in bonds and fixed deposits of similar maturity periods, but may have small equity exposure of up to 15 per cent apprx. FMPs have a fixed maturity period while MIPs can be bought/ sold at any time you want. Average return from them is 8 to 11%. Furthermore, the returns from FMPs of more than 365 days tenure also attracts lower to nil income tax as they fall under long term capital gains. However, they both involve credit risk and hence returns are not guaranteed but may be deemed to be reasonably safe. Further, they are more liquid and tax-efficient than fixed deposits. An investor can exit any time during the term as FMPs are listed on stock exchanges though exit load may be 0.50 % apprx.

FMPs and MIPs are a good choice for those looking for capital protection first and then allowing room to maximise returns through equity exposure. You must ensure that you invest in FMPs/MIPs which have better rating from credit risk mapping agencies as the difference in yields between the two instruments arises out of risk taken on in the portfolio. An FMP/ MIP having top rated instruments in its portfolio would deliver lesser returns than FMP/MIP based on lower rated papers. Higher returns means that the fund manager has been taking on more credit risk in the portfolio. Investments in both FMP/ MIPs make sense till the interest rates remain high, because historically, bond yields tend to move together with the interest rates. Once interest rates goes down, investments in FMPs and MIPs becomes less lucrative. Since FMPs and MIPs predominantly invest in debt, they are the beneficiary by default. 

Options if you are an investor with high risk appetite: 

It is not suggestible to take high risk specially in short term. High risk, if at all, is only good for long term investor. However, there are ways wherein investors today can benefit using their expertise or knowledge even in the short term.

Stock Market: You may invest in stock market through proven wealth management companies like Anand Rathi Securities Ltd., IIFL ( India Infoline), Kotak Securities etc. who do good research before offering advice. It is suggestible not to through a normal broker as you may not get sound advice based on research from them.  

Commodities Market: You may invest in Gold, Gold ETF’s, Silver and many other commodities. Here again it is suggestible to go through proven wealth management companies like Anand Rathi Securities Ltd., IIFL ( India Infoline), Kotak Securities etc. who do good research before offering advice. One can invest in gold by buying e-gold and ETFs. Of late, gold ETFs have emerged as a convenient means of investing in gold as there is no physical delivery or security issues.

Corporate Fixed Deposits: One can also look at corporate Fixed Deposits with 1-2 year time horizon. These deposits can earn you as much as 9-13 per cent per annum. However, they are unsecured and carry credit risk. Also in the current scenario where corporates are facing liquidity crunch, they are more prone to default on their payments. An investor should seek advice from quality wealth management companies.

Higher returns are normally a function of higher risk. The balance is very important. The varied investment options for the short term have their pros and cons in terms of risk-appetite, liquidity, maturity period etc. So invest as per your risk appetite. Understand the risk involved and seek advice from certified wealth management companies.

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