Investment can span over long and short term period depending upon the purpose. Short term investment is preferred if the fund is needed in near future. There are various short term investment options in the market. However, all are not suitable and equally investment worth.

What is short term investment?

Any investment for a period of 1 day to 3 years is classified as short term. If the investment is for few days like 7 days, 15 days or 6 months for individual then it is referred to as ultra short term. If it is just for 1 day it will be known as overnight investment.

As per Income Tax rule of India any investment in share market upto 1 year is considered as short term, while investment in debt and hybrid mutual fund it is upto 3 years. In some cases investment upto 5 year also considered as short term investment e.g. Public provident Fund, National Pension Scheme etc.

How it works?

Investors, corporate or individual, perk their excess fund in certain financial products till the time it is needed. At the time of utilsing the fund for the actual purpose, they simple withdraw and utilise. This process helps the investor to earn something in the intermittent period.

Reserve Bank of India has made it mandatory for Banks to maintain a portion of deposits as Cash Reserve Ratio (CRR) with RBI. Many a times banks fall short of this requirement. In that case, Banks approach other banks or corporate for cash to meet this gap.

Sometimes corporate require money for short period for its urgent need like payment to suppliers, statutory bodies etc. Such corporate raise funds from fellow corporate or banks, without disturbing their existing investments. The borrowing or invest get squared off on expiry of the period.

These types of investments come under overnight and ultra short term investment. Individuals may also resort to short term investment for their various needs like emergency corpus, funds for school and college fee, medical expenses etc.

Short term investment products

Few of the well-known product for both corporate and individuals are as below:

1) Saving account

Now a days interest is paid on balance in saving account. It is an easy option for individuals to hold fund for short period. It cannot be called investment. However, the account holder will have some earning on the fund and it is as good as cash.

2) Equity

It is the most common option for short term investment. It is purely speculative. Investment in certain shares are made for short term assuming windfall gain considering various factors like dividend declaration, quarterly results, new projects, favourably Government policies etc. Major stock trading houses and High Networth Individuals resort to this option for short term gain.

Otherwise, equity yield good return over long time if invested in well selected shares.

3) Certificate of Deposit

Banks and corporate use this product to mobilize or invest funds for short period. Another similar product is commercial paper (CP) or promissory note. Though individuals can also participate in CD and CP, it is denominations are high – minimum ₹ 1 lakh.

4) Fixed Deposit

The ideal product for individual is bank fixed deposit (FD). Corporate can also invest in FD. The investor can choose denomination and tenure as per his/her requirement. The FD tenure ranges from 7 days to 10 years. A tenure upto 12 months is considered short term beyond which it is long term. Above 5 years is very long term.

5) Treasury bill

It is also known as T-bill. These are launched by RBI on behalf of Government. The tenure of T-bills are 14 days, 91 days, 182 days and 364 days. Government uses such funds for its short-term fund requirement.

Treasury bills are zero coupon securities and pay no interest. Instead, they are issued at a discount and redeemed at the face value at maturity. It means if the per unit cost or face value is ₹100, it will be offered to investors at ₹95. At the time of redemption, the investor will get ₹100 for his/her investment of ₹95. The difference of ₹5 is the earning. It can be calculated and expressed as a percentage earning per annum.

Individual can also invest in T-bills. The minimum investment in T-Bill is ₹25,000.

6) Non-Convertible Debenture or corporate deposits

This is another product through which corporate raise funds from public. These product offer interest payment with monthly to annual pay-out option. These are listed in stock exchange for exit and entry by investors.

7) Mutual funds

There are different mutual fund schemes for short term investment. These schemes invest money of the investors in different debt products like NCDs, CDs, T-bill etc. These schemes are known as debt mutual fund and money market mutual funds.

8) Other products

Apart from the above, there are various other product for short term investment like recurring deposit, post office deposit, stock market derivatives etc.

In recurring deposit one can deposit money in monthly instalment as per convenience for a period of 12 months to 60 months. In post Office deposits can be made on monthly basis or onetime.

Stock market derivatives are complex financial product. This products are not recommended for layman. Adequate knowledge and understating is required to invest in these products.

Regulations & Taxations

The products for short term investment are regulated by SEBI and RBI.

As per Income Tax Act, short term investments are taxed for capital gain (Market price minus acquisition cost) and interest earned. Tax is levied on short term capital gain @ 15% plus applicable surcharge and cess. This is applicable for investment in equity and mutual funds.

Interest income earned by investors on deposits are taxed @ 10% if the interest earned is more than ₹40,000 per year. In case of senior citizen exemption limit is ₹50,000. The tax will be levied @20% if PAN is not provided.

Pros & Cons of short-term investment

• It is less risk as the money is locked for a short period. However, speculative investment in equity for windfall gain bear high risk.
• Returns are low. Since CD, CP, T-Bills, NCDs are issued Government or good rated corporates chances of default is nominal. Even debt mutual fund and money market mutual funds are also secured as they invest in these products.
• There is no lock in period as the investment are for short period. In NCD there is lock in period. However, it can be traded in stock exchange. Therefore, it can be converted to cash quickly.
• Debt product like CD, CP, NCDs are rated by rating agencies. The rating report give details about the risk and safety of the product for consideration of investors.
• Short term investment products are regulated by RBI & SEBI.

Conclusion

Investment should always be long term and specific to goals. Short term investment if opted should be for perking funds in the intermittent period only. It should not speculative. As we know short term investment offer low return, it can’t contribute to wealth creation. Individuals must follow the personal finance process for investment.