While investing in a short-term plan, you should keep in mind certain factors, such as liquidity, safety, returns, etc. As there are many plans available in the market, you should consider your risk tolerance level & investment objectives when choosing one. It is basically a kind of financial instrument which offers a return on investment within a short span of time, normally ranging between a few days & a few years. These investments are highly liquid & less risky in comparison to long-term investments.
The primary objective of a short-term investment plan is to provide substantial returns in a shorter duration. Hence, if you are interested in investing in short-term funds & have a waiting period of up to 3 years, this article will help you. Let’s first learn how to choose the appropriate investment plan for a 3-year tenure.
How to Choose the Right Investment Plan for a 3-Year Horizon
- Risk Appetite:
The selection of investment depends on how much you are willing to take risks. Where bonds, mutual funds, etc. bear some risks, fixed & recurring deposits are safe.
- Financial Objectives
The selection of investment depends on what is required after a 3-year period, i.e., what your objectives are. This means the reason for your investment, which can be buying a car, planning a trip, or just higher returns.
- Investment Amount
The total amount to be allocated towards the acquisition of funds with the intention of generating profits over time is known as the investment amount. How much amount would be invested also matters a lot while choosing the right investment plan, i.e. whether in lump sum, or regular investments.
- Liquidity Requirements:
In case any unforeseen circumstance or need arises, some assets like liquid funds provide liquidity, which means these investment plans allow for the withdrawal of funds before the completion of the 3-year period.
Benefits of 3-Year Investment Plans
- Liquidity
Due to funds not being blocked for a longer duration, 3-year investment plans offer more liquidity. This means funds can be withdrawn before maturity in case any unforeseen situation arises.
- Diversification
There are many different investment plans available for a 3-year period; a mixture of all such plans can be used to plan a well-diversified portfolio. This means that if you are reluctant to take risks & prefer the security of returns, opt for a fixed deposit. On the other hand &, if you are willing to take risks & want high returns, invest in ULIPs.
- Optimal Returns
A 3-year period is a good enough time to let your funds grow with the power of compounding, i.e. allowing you to get meaningful returns. As we know, most of the 3-year plans offer low to moderate risks, which means they are less affected by market fluctuations, i.e. less volatile.
- Flexibility
It allows you to either increase or decrease the investment amount according to your current financial condition.
- Risk Management
With proper allocation & diversification of funds, you can mitigate the risks associated with the funds being invested in one asset class only. With diversification of funds, it can be assured that even when the market goes down, you will continue getting income. Also, if you find an asset class to be risky, it allows you to withdraw your funds.
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Some Options of the Short-term Investment Plans for a 3-Year Period
- Bank Fixed Deposits
The investments can be made for a period of 6, 9, 12 months or longer as offered by different banks. They can be reinvested after the maturity date if not required immediately, & the tenure of return can be monthly, quarterly, half-yearly, yearly, or cumulative. The interest amount on fixed deposits is eligible for a tax deduction under the Income Tax Act, 1961, according to the income tax slab.
- Debt Mutual Funds
These funds can be redeemed in a short period of time, with returns of around 7% p.a., which are neither consistent nor confident.The profits earned within a period of 3 years will be added to your income for tax calculation purposes. &, the profits earned over 3 years will be taxed at @20% after indexation.
- Liquid Funds
Here, the funds are invested in government deposits & securities, hence are highly liquid. The funds under this plan can be invested for a period of even 1 day up to 90 days. They offer a return rate ranging between 4% and 7%, alongwith the flexibility to withdraw funds in case of need, making them one of the best options for a 3-year period.
- Recurring Deposits
Amongst many short-term investment plans, a recurring deposit is a low-risk investment option offering assured returns. It offersflexibility in choosing the amount & the tenure of investment. It can be availed in a flexible tenure ranging from 6 months to 10 years, letting you create a short or long-term corpus.
- Short-Term Funds
These are meant for short-term & are highly liquid, hence carry low risk, normally for a 3-year period. Examples of these funds are commercial papers, corporate bonds, government securities, etc.
- ULIPs
A ULIP policy means insurance cum investment plans which allow you to invest to meet your long-term financial commitments along with providing life insurance coverage.ULIP offers a part of the premium to be paid towards life insurance &the rest towards investment. One can opt to invest in debt, equity, or both, depending upon the level of risk &your objectives, making it an ideal investment option. It provides a flexible option to switch between the funds anytime during the policy tenure.
- Gold
Gold is considered to be the highest-value metal investment option. It is the most preferred investment option in India due to its high liquidity & inflation-beating capacity. It can be purchased in the form of coins, bars, jewellery, sovereign gold bond schemes, gold exchange-traded funds, etc.
Conclusion
Short-term investments offer many benefits, including liquidity, diversification of funds, fewer risks, higher returns, & flexibility. They are considered to be safe investment options, but offer returns on investment with a fixed rate of interest. One should analyse how different investment options available help you achieve future financial objectives. Also, the investment decision should be in proper alignment with the investment horizon, risk appetite, & financial objectives. Hence, a wise investment, staying informed, & a holistic approach lead to a secure financial future.
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