Short Term Investment Plans: Types, Benefits and Taxation

A person's investments should be based on their financial goals. For human beings, money is a precious commodity. Apart from working hard, one must invest sensibly in the various short-term and long-term investment plans available to fulfil financial goals. Most people focus on long-term investments, which helps them meet their financial requirements post-retirement. Many ignore their immediate needs and short-term goals. Here is when short-term investments come into play.

Short-term investments are those liquid investments that can easily convert to cash within five years. The investment period in short-term plans usually ranges from four months to less than five years. These types of investments also have the facility of premature withdrawals.The short-term plans can be used for parking emergency funds and are usually for three months. They can also fulfil a desire or need when these short-term plans mature. For example, If a person wants to buy a product (like a mobile, an appliance etc.) and knows it will be launched in a year, then a short-term investment can be made for that year. The money invested here would eventually be used to buy the product. This amount would also fetch interest, which would result in additional money.Several short-term plans give high returns in a short period in India. These short-term investments, although are quite risky, yet give high returns. Many investors use them to make quick profits.

Short-term investment plans are a way of investing in financial instruments for a short period. The primary purpose of investing in short-term plans is to earn extra money while maintaining liquidity.Short-term plans are preferred by many because they give high returns, and withdrawals can be made anytime. Apart from this, short-term plans also protect the capital. These plans are not only beneficial to an individual, but they also help the Government, companies and banks to maintain liquidity.

1. The tax liability can be distributed for five years. Paying small amounts is better than paying a lumpsum in a financial year.
2. It will result in the investor focusing more on the financial goals rather than getting stressed out.
3. Provides security to the family. If something unforeseen incident happens, then the nominee, also called beneficiary by some, will receive the sum assured.
4. Short-term plans provide safety and liquidity.

The only drawback is that the life insurance coverage is only twenty times the salary. This amount cannot be changed or increased.

Here are some things that should be kept in mind before investing:

1. Liquidity: the investments can be turned into cash anytime. There is no lock-in period, where money gets blocked for a specific time.
2. Safety of Capital : the best investment option keeps the capital safe. It keeps the funds safe and can be used whenever required. Keep some funds aside so that it is readily available when needed. Some examples of these are savings accounts and treasury bills etc.
3. Taxability : earning massive amounts as interest or short-term capital gains is not the purpose of short-term investments. A large chunk of this goes into paying taxes, and it is better to save on taxes.

1. Capital gains: If a person invests in ultra short-term debt funds or zero coupon bonds like treasury bills, then it will attract capital gains. An amount withdrawn within three years attracts short-term capital gain (STCG) , whereas anything above this period is considered long-term capital gains (LTCG) .
2. Coupon of Interest Paying Investment: Short-term investments pay taxable interest. However, under Section 80TTA, a rebate of Rs. 10,000 can be claimed.

Here are some of the short-term investment options that one can choose from:

The features of a savings account are:

• a. These debit cards help withdraw cash from ATMs.
• b. They are also used for online banking and purchases on an e-commerce platform.
• c. Debit cards can also be used for making payments in person. This has helped in promoting a cashless economy.

1. Minimum balance required: Most banks require their customers to keep a minimum balance in their savings accounts. However, others, like salary savings accounts and zero balance savings accounts, do not require their customers to keep a minimum balance in their savings accounts. A fine will be imposed if a person doesn’t maintain a minimum balance in accounts where it is mandatory.
2. Flexibility in withdrawals: the amount of the savings account can be withdrawn from anywhere. This withdrawal can be made by using an ATM (Automated Teller Machine) using a debit card.
3. The amount that can be withdrawn and the number of times it can be withdrawn is informed by the bank where the savings account is opened.
4. Some banks charge a nominal fee on the withdrawal amount after a certain number of transactions on the ATM. This fee is not charged if withdrawals are made directly from the bank.
5. Debit card: almost all savings bank accounts come with a debit card. The uses of a debit card are:
6. A passbook and chequebook are given when a savings bank account is opened in any bank or financial institution. The passbook helps check all the transactions (deposits and withdrawals) and is used for checking the balance in the account. One must keep the passbook updated all the time.Chequebook is used for withdrawing cash from the bank. It is also used for depositing an amount from another person to their savings account. Cheques are also used to issue an amount to a third party. It is invalid if the account holder does not sign it.
7. No age restrictions: there is no particular age limit for opening a savings account. In the case of a minor (below 18 years), a guardian can manage the account. Once the minor grows up, they can handle the account independently. Many different types of savings accounts can be opened.
8. Internet banking: nowadays, every bank has a mobile app and an official website. It helps an individual save time from going to the bank. All online banking facilities can be availed through the mobile banking app or website.

The features of Recurring Deposits are:

1. The minimum amount of investment : A small amount of Rs. 500 is sufficient to open a recurring deposit.
2. Any amount can be invested in recurring deposits, and there is no upper limit for investing.
3. The interest rate given is between 4.5% to 7% per annum. This interest rate offered is equivalent to fixed deposits.
4. Tenure: A few months to 10 years. It is when the recurring accounts mature, and the amount in this account can be withdrawn.
5. Premature withdrawals are allowed by some banks. However, most banks do not allow premature withdrawals.
6. A person can instruct the bank to auto-debit the amount of the recurring account from the savings account. It saves time, and the person doesn’t have to remember the deposit date.
7. It develops a habit of saving money in individuals.

The features of Fixed Deposits are:

1. An individual can decide on the investment tenure, which varies from 7 days to 10 years.
2. Senior citizens get a better interest rate.
3. Full or partial withdrawals are allowed. In an early withdrawal, the investor will have to pay the penalty.
4. Individuals can avail of loans on it. This way, it proves to be helpful in times of need.
5. Tax-saving fixed deposits are a good investment option for taxpayers. Under 80C, they can save taxes.
6. It is an easy option to invest excess funds for a short time.

The features of Short-term Debt Mutual Funds are:

1. The tenure of this form of investment is usually between 6 months to 3 years. However, other short-term mutual funds are of shorter duration, like Overnight Funds, which provide daily investments.
2. These short-term debt mutual funds have a low capital appreciation by providing steady and safe returns. Transaction fee for such investments is relatively low.
3. TDS (Tax Deducted at Source) is not deducted for investing in Debt Mutual Funds .
4. Debt Mutual Funds are moderately risky as the stock market does not directly impact them.

The features of Corporate or Company Deposits are:

1. Corporate or Company deposits are for a tenure of 1 to 3 years.
2. The interest rate in these deposits is between 9 and to12% per year.
3. The interest earned from this form of investment is taxed.
4. They are less risky as compared to stock market investments.
5. Corporate and company deposits usually have a lock-in period of 6 months.
6. No TDS (Tax Deducted at Source) is deducted if the interest earned is less than Rs 5000.

Some of the features of the National Savings Certificate (NSC) are:

1. A minimum amount of Rs. 1000 is required to invest in National Savings Certificate.
2. There is no maximum limit amount for investing in NSC.
3. TDS (Tax Deducted at Source) is not deducted, and the interest earned from theNational Savings Certificate is 6.8%.
4. It has a 5 years lock-in period, and money cannot be withdrawn before the stipulated time.
5. The investor can get tax benefits up to Rs. 1.5 lakhs. It has to be filed under Section 80C of Income Tax.

Some of the notable features of Treasury Bills are:

1. Treasury Bills offer the safety of capital. They are less risky as the investment period is less than a year. Some of the notable features of Treasury Bills are :
2. Greater liquidity as compared to other short-term investments.
3. Trading the T- Bill is also allowed if the investor needs money urgently.
4. They are reliable since the Central Government issues them.
5. The minimum investment required to invest is Rs. 25,000. The additional investments can be in multiples of Rs. 25,000.
6. The returns are in the way of capital appreciation. The investor does not earn interest on them; they are also called zero-coupon bonds.
7. Investment in Treasury Bills can be made through commercial banks, primary dealers or depository participants.

The features of the Stocks, Derivatives and Commodity Markets are:

1. While investing in stocks, the investors are given some rights. These rights are related to assets, dividends, voting and pre-emptive right.
2. Investors are likely to earn higher capital gains when they invest in stocks of companies whose valuation increases.
3. Short-term investment in stocks can be made through the stock exchange, direct stock plan, dividend reinvestment plan, and mutual funds.
4. Derivatives have a maturity or expiry date, after which they are terminated automatically.
5. The derivatives are of 3 types: futures and options, forward and swaps. They can be traded in equity markets, financial-bearing assets, commodity markets and foreign exchange.
6. Derivatives can be used as leverage instruments.
7. All transactions related to derivatives take place on a specified date. There is no limit on the units that can be transacted through derivatives.
8. Commodity investment helps hedge against losses in other asset investments and mitigates volatility.
9. The commodity market offers a wide variety of commodities that can be traded. It is used for the price discovery of commodities.
10. Commodities can be traded in the cash market and futures and options.

Some of the notable features of Unit Linked Insurance plans are:

1. Lock in period for Unit Linked Insurance Plans is 5 years.
2. These plans are a combination of mutual fund investment and life insurance policies.
3. Tax benefits of up to Rs. 1.5 lakhs under Section 80C of Income Tax can be claimed by the person who has bought units of ULIPs .
4. During the tenure of these plans, the investor can switch between equity, mutual fund or debt as required.
5. Fund managers are appointed to manage them. The investment amount is termed as ‘premium’.

The features of Short-term Funds and Liquid Mutual Funds are:

1. These investments are linked to money markets.
2. They are highly liquid.
3. The investments of these funds are in short-term debt instruments.
4. The maturity is usually 15 days to 91 days.
5. They are free from any market risk and interest risk.

1. Savings account: The savings account is the most common type of short-term investment option. The money kept in the savings account fetches interest. Even though the interest rate is relatively lower, it provides security and liquidity. A savings account holder may use this balance quickly as a parking fund required for a specific purpose. A good use of a savings account is to cover most expenses required in every household.
2. Recurring Deposits Recurring deposits (RD) are short-term savings option that gives lucrative and good returns. A person can open this account through a savings account or in a post office. To open a recurring account through a saving account, one can do it through net banking. In PORD (Post Office Recurring Deposit) small monthly cash deposit helps build a corpus. This account can be opened for 5 to 10 years. The current interest rate for RD in the post office for 10 years is 5.8% to 6.8% per annum.
3. Fixed Deposits Fixed deposits are the most common and safest form of short-term investment available. Individuals can open it in any bank or post office for a week to 10 years. Many NBFCs (Non-Banking Financial Companies) offer fixed deposits at a reasonable interest rate. The post office also gives a good interest rate on fixed deposits without deducting TDS (Tax Deducted at Source).Fixed deposits give guaranteed returns and can be renewed on maturity or credited directly to the savings account once matured. Many banks also offer auto-renewal, where the fixed deposit automatically gets renewed.
4. Also Read: Is FD Interest Taxable? Income Tax on Interest on Fixed Deposit
5. Short-term Debt Mutual Funds If a person is looking for an investment option between 3 years to 5 years, then this is the best form of investing. They are market-linked, and the capital is safe, despite any volatility.These funds are usually invested in Government Bonds, Financial market instruments and Corporate Bonds. This type of investment is a good option for those who don’t want to take risks and, at the same time, want good returns.
6. Corporate or Company Deposits The company uses the funds collected from these deposits and investments in Corporate Deposits to expand its business and operations. They are also known as NCDS (Non-Convertible Debentures). They are riskier than fixed deposits and debt mutual funds and offer higher returns.
7. National Savings Certificate National Savings Certificate, popularly known as NSC, is a low-risk and tax savings scheme which is available in any post office in India. It has a lock-in period of 5 years, and the interest is paid at maturity. If the depositor urgently requires money, then these national saving certificates can be transferred to another person.
8. Treasury Bills Treasury Bills are commonly called T- Bills. They are short-term Government securities that the Central Government of India issues. The maturity period of the Treasury Bills is less than 1 year. The different tenures are 91 days, 182 days and 364 days. They are also called zero-coupon securities as they don’t pay interest. The RBI (Reserve Bank of India) issues Treasury Bill in the open market through weekly auctions (every Wednesday)
9. Stocks, Derivatives and Commodity Markets These are short-term investment plans that give high returns. Those with a financial background and stock market knowledge should invest in stocks, derivatives and commodity markets. People with high-risk tolerance can also opt for short-term investments depending on their goals. It won’t be called a short-term investment if held for a longer time.
10. Unit Linked Insurance Plans Unit Linked Insurance Plans (ULIP)s provide two types of benefits to the investor. It provides an insurance cover and also serves as an investment by benefiting from stock markets, debt funds and, at times, from both.
11. Short-term Funds and Liquid Mutual Funds Liquid mutual funds, money market funds and short-term funds are mutual funds that invest primarily in securities. If a person wants to get high returns quickly, consider these investments. Withdrawal before 3 years will be taxable.

Every individual must make a habit of investing, be it for the long term or a short term. Short-term investment plans are a good way of investing, keeping the immediate future in mind. They provide security, financial stability and availability of cash to manage unforeseen expenses. It offers flexibility to withdraw money and has low transaction charges. Besides this, short-term investment plans offer consistency, fewer transaction costs, and liquidity. Therefore, an investor can expect a considerable amount of profits.