Best Short-Term Investment Plans in India Explained

16 min read • Updated 30 October 2023
Written by Anuj Agarwal
Top Small Investment Plans

In the dynamic realm of financial planning in India, short-term investment plans are crucial for wealth creation. The prominence of best short-term investment plans has grown rapidly as individuals actively seek avenues to invest according to their immediate financial goals. While these short-term investment plans with high returns in India address various wish lists, long-term planning is equally vital, focusing on children’s education, buying a house, and retirement.

For those keen on shorter durations, options like short-term investment plans for 3 months are gaining traction. As you chart your financial journey, finding the best saving plan for short-term or even short-term savings plan becomes paramount, especially in alignment with your financial capabilities and aspirations.

Small investment plans in India, therefore, offer a vast array of options for every kind of investor. So, before delving into any specific short-term investment plan or the like, understanding the essence of short-term investments is pivotal. Choose instruments wisely, bearing in mind your risk tolerance and objectives.

What is a Short-Term Investment?

Short-term investments are financial instruments with high liquidity, flexibility, and short-term tenures ranging from a few days to a few years. They are the preferred investment instruments for a huge demographic of the Indian subcontinent that look to gain quick returns without the waiting or time risk associated with it.

How Do Short-Term Investment Plans Work?

Short-term investment plans are ideal for those who choose not to take a lot of market risk for a longer duration of time. They are securities that are easy to invest in and have a maturity or investment period of a few months to a few years. There are certain highlighting pillars that indicate the short-term nature of investment plans. Let’s take a look at some of them:

Time Scope: The term itself suggests the time scope for short-term investments lasts anywhere from a few months to a few years. In general, short-term is considered less than three years.

Liquidity: One of the signature aspects of a short-term investment is the liquidity. This basically entails that the short-term instruments are a lot more liquid than long-term ones. You can convert them into cash or equivalents without incurring any significant penalties whatsoever.

Flexibility: Flexibility is another aspect of short-term investment plans that stand out in the investment arena. Short-term investment plans, such as mutual funds, allow investors to put or take out money in a more flexible manner in comparison to their long-term counterparts.

Taxation: The taxation process for short-term plans is different than the long-term ones. Depending on taxation jurisdictions, short-term capital gains might be taxed at a higher slab in comparison to long-term plans.

Market Swings: The market is more likely to influence the performance of short-term plans. The long-term counterparts, such as FDs, are less likely to be influenced by the swings in the market.

Best Short-Term Investment Options

When it comes to the best short-term investment plans, you have plenty of options at your disposal. Short-term investment plans are not only ideal for small investors, but they also deliver several benefits, including income tax exemptions. Some popular small investment schemes are:

The above list is only indicative, and there are many more options. So, let us look at the chosen few in detail.

InvestmentRate of ReturnHolding PeriodWhere to Invest
Public Provident Fund (PPF)7% – 8% p.a.15 yearsBanks and Post Office
Bank Fixed Deposits2.5% to 8% p.a.7 days to 10 yearsBanks
Systematic Investment Plan (SIP)Variable1 year to No limitMutual Funds
National Savings Certificate (NSC)6.8% p.a.5 yearsPost Office
Liquid Mutual Funds2% to 6% p.a.1 day to No limitMutual Funds
Corporate Deposits6% – 12% p.a.1 to 3 yearsCorporate Houses
Savings Account2% to 7% p.a.NilBanks
Treasury Securities7.5% p.a.91 days to 364 daysGovernment Securities
Recurring Deposits4% to 8% p.a.6 months to 10 yearsBanks
Debt Mutual Funds6% – 9% p.a.36 months to No limitMutual Funds
Equity Mutual Funds7% – 15% p.a.12 months to No limitMutual Funds
Stocks, Commodities & Derivatives MarketVariableLess than a day to no limitStock Exchanges
Real Estate Investment Trusts (REITs)4% – 12% p.a.VariesReal Estate Markets
Gold ETFsVariable1 day to No limitMutual Funds & Stock Exchanges
Infrastructure Bonds5% – 7% p.a.5 to 10 yearsFinancial Institutions

Public Provident Fund (PPF): 

One of the oldest government-sponsored small savings schemes, PPF is popular among taxpayers of all categories. The PPF scheme provides triple benefits of long-term retirement savings, stable returns, and security. The critical highlights of the plan are:

  1. You can open an account at any bank or post office.
  2. The minimum investment required in one financial year is INR 500. 
  3. The initial account tenure is 15 years, extendable in 5-year blocks. 
  4. Any Indian citizen can open a PPF account for themselves or in the name of a minor. But, the individual can hold only one PPF account.
  5. The GOI’s Ministry of Finance notifies the applicable interest rate every quarter during the financial year. 
  6. The current rate is 7.10% per annum, valid until September 30 of 2022-23. 

Bank Fixed Deposits:

Bank FD is one of the safest investment options with flexible features for the Indian population. Every bank offers schemes under the FD category that suit individuals’ preferences. Some deposit scheme features are:

  1. Open the account in any bank in single or joint names, including minors.
  2. There is no limit on the investment amount in different fixed deposit versions under the cumulative and non-cumulative categories.
  3. The FD has a tenor from 7 days to 10 years. 
  4. Investors get the benefit of interest compounding depending on the deposit tenure.
  5. The payable interest rate varies according to the deposit tenure fixed by individual banks.
  6. Senior citizens earn preferential interest rates over the normal  rate. 
  7. You can withdraw the deposit prematurely or seek a loan by pledging the fixed deposit, adding liquidity to the investment option. 

Systematic Investment Plan (SIP):

Mutual fund investments have emerged as the preferred investment option for higher returns from fund allocation in market instruments. The SIP is an alternative method to investing from the conventional lump sum, allowing small investors to gain benefit from these small investment schemes. The key highlights of the investment option are:

  1. You can start a SIP by paying a small amount periodically for converting into units.
  2. The minimum investment can be Rs. 500, directly deposited from your bank account.
  3. A professional fund manager appointed by the fund house allocates funds on your behalf to maximize returns. 
  4. The portfolio created holds diverse assets matching your risk profile.
  5. You benefit from the SIP investment due to the power of compounding with reinvestment of the profits.
  6. Using rupee cost averaging, you can get more units for less money and strike gold when the market rises.
  7. You are assured of fund liquidity as you can redeem the units partially or wholly on a business day based on the latest NAV depending on the mtual fund scheme chosen for investment

National Savings Certificate (NSC):

The NSC is among the popular government-sponsored small investment schemes. But you can purchase the instrument only at post offices. It is ideal for risk-averse individuals seeking to diversify their portfolio options with a fixed income instrument. Some of the critical features of NSC investments are:

  1. NSCs are available in denominations of Rs. 100, Rs. 500, Rs. 1000, and Rs. 10000 without any upper investment limit.
  2. You can choose from NSC accounts under  three categories:
  • Single holder
  • Joint certificate “A”or “B.”
  1. You can nominate your family member to inherit the asset in case of sudden demise.
  2. The GOI’s Ministry of Finance notifies the quarterly interest like all other government-backed small investment plans in India.
  3. Accordingly, the current interest rate for the September 2022 quarter is 6.8% per annum, compounded annually.
  4. All banks and NBFCs accept NSCs as collateral for extending loans.

Liquid Mutual Funds:

As the name suggests, Liquid Mutual Funds assure fund liquidity to the investor. They are debt funds with short maturity period of up to 91 days. Thus, you lend money to companies for redemption within the maturity date, making the investment safe and liquid. So, the investment is one of the safest mutual fund instruments despite depending on the market to deliver returns. Some key highlights of investment are:

  1. Liquid Mutual Funds allocate assets in instruments like Certificate of Deposit (CD), Commercial Paper (CP), and Treasury Bills (T-Bills) with a maturity of up to 91 days.
  2. The investment option with short-term underlying securities bears a lower interest rate risk than other debt instruments.
  3. Liquid mutual funds do not have a lock-in clause and are redeemable whenever you want. 
  4. The instrument is eligible for instant redemption per scheme per day per investor. 

Corporate Deposits:

A Corporate Deposit is a Company Fixed Deposit held by a corporate body for a fixed period paying a predefined interest rate. Banks and NBFCs offer corporate term deposits with different maturity periods. So, the small investment’s salient features are:

  1. Corporate deposits pay a higher interest rate than banks for their fixed deposits.
  2. The deposit tenure ranges from a few months to a few years and is an alternative investment option.
  3. Since corporate deposits do not enjoy DICGC cover of Rs.5 Lac like bank fixed deposits, look for AAA or equivalent rated schemes to ensure the safety of funds.
  4. Accordingly, choose ratings of ICRA or CRISIL as the benchmark to conclude your investment option.

Features of Short-Term Investments

Short-term investments come with many features that make them stand out to investors. Let’s take a look at some of them:

  • Flexibility & Purpose: Primarily designed for immediate financial goals, these investments often have the flexibility to add or withdraw funds. Whether you’re dreaming of a holiday, a car, or just an emergency fund, short-term options have got you covered.
  • Interest Rates Influence: Particularly for bank-related options, the returns you get might be influenced by changing interest rates. If rates go up, your returns might too, and vice versa.
  • Market Influence: Certain options, especially those linked to stocks, might feel the market’s pulse more. This means their value can go up or down based on market conditions. On the other hand, choices like fixed deposits don’t dance to the market’s tune.
  • Quick Access: Short-term investments mean fast access to your money.
  • Risk & Returns Balance: While generally less risky than long-term investments, the returns from short-term plans might be lower. However, some riskier options offer higher returns. Essentially, the potential for gain is closely tied to the level of risk you’re willing to accept.
  • Short Duration: They last from months to a few years.
  • Tax Aspects: Returns might be taxed differently.
  • Variety: There is an ocean of choices for you to choose from.

Benefits of Short-Term Investment Plans

Tons of benefits come with short-term investment plans. Let’s take a look at some of them:

  1. Safety Net: They can act as a financial cushion. When unpredicted needs arise, having accessible funds can be a game-changer, ensuring you’re not left in a pinch.
  2. Easy Exit: Exiting or selling off is simpler.
  3. Opportunity: As interest rates and market conditions change, short-term investments can capitalize on opportunities that long-term investments might miss.
  4. Adaptability: With the ever-changing financial landscape, short-term investments allow you to adapt quickly. They offer a way to respond to economic shifts without locking your funds in for extended periods.
  5. Lower Exposure: Generally, short-term investments expose you to less market volatility over time. This means you’re less likely to see massive swings in your investment value, offering a more stable return path.
  6. Cash Flow: Improve your cash flow with quick returns.
  7. Flexibility: Got an unexpected expense? Need funds for an upcoming trip? Short-term investments generally offer higher liquidity. This means you can convert them into cash easily, often without hefty penalties.
  8. Diversification: Investing in short-term assets lets you diversify your portfolio. It’s like not putting all your eggs in one basket, which can reduce overall risk. By mixing up your investments, you’re better equipped to handle market ups and downs.

Drawbacks of Short-Term Investments

With the benefits that come along with them, there are definitely downsides to it, too. Let’s take a look at some of the concerning drawbacks that accompany Short-Term Investments:

Capital Limits: Short-term investments might not always lead to substantial capital growth. Because of their brief nature, they might not reap the same gains seen in long-term growth trajectories.

Frequent Tracking: Needs more attention.

Interest Rate Sensitivity: Short-term investments can be more reactive to immediate interest rate changes. A sudden dip in rates can affect the returns, making them less predictable and sometimes less profitable.

Lower Returns: Typically, they might not provide as high a return rate as some longer-term investments. The quick turn-around time means you’re trading potential growth for quicker access.

Market Fluctuations: While they’re less exposed to long-term market trends, short-term investments can still be sensitive to daily or monthly market fluctuations. This volatility can be a deterrent for those looking for stability in returns.

Tax Implications: Earnings from short-term investments are often taxed differently than long-term gains. In many jurisdictions, they might be subject to a higher tax rate, reducing the net profit.

Transaction Costs: If you’re frequently buying and selling short-term assets, especially in stock markets, those transaction fees can add up. Over time, these costs can eat into your returns.

Uncertain Growth: Since the focus is on the short term, there’s no guarantee of consistent growth. One might miss out on the compounding benefits associated with long-term investments.

Tenure of Short-Term Investment Plan

The tenure of a short-term investment plan refers to the time horizon of how long the investment is being held or intended to be held for. Tenures are crucial factors to be considered while investing in any security or commodity. That being said, the tenures of a short-term investment plan can range from anywhere from a few days to a few years. Conventionally, short-term investments are considered those with a tenure period of less than three years. Depending on the plan, it can stretch from a few days, offering higher flexibility and lesser time risk, up to three years.

Things to Consider Before Investing in a Short-Term Investment Plan:

The primary advantage of short-term investments is that you can monetize the instruments at typical durations of up to 5 years and lower, depending on the investor’s needs. Though there are many small investment schemes to match your preferences, you must choose wisely. So, here are a few tips to sail through the investment horizon for your benefit. 

  • Set Investment Goals:

Setting investment goals is the stepping stone for choosing beneficial investment options and making an informed choice. Fixing time frames is essential to meet the objective, but when choosing short-term investments, limit the tenure to 5 years. 

  • Analyze investment, return, and risk:

Understanding how each investment instrument works and their potential risks and profits would help. Diversifying your portfolio by exploring ETFs, debt funds, mutual funds, equities, and real estate can help you achieve this goal.

  • Invest in High-Yielding Instruments:

Earning high returns is critical for short-term investments to meet your financial goals. Try mutual fund options by sticking to the high-yield, low-risk investments if you need the money in 3 to 5 years.

  • Rebalance and reassess your portfolio:

Your portfolio should be reassessed at regular intervals to determine if it needs to be rebalanced. A rebalanced portfolio means re-allocating funds in accordance with predetermined asset allocations. 

  • Look to Create a Diversified Portfolio: 

Putting all your eggs in a single basket is not a good idea for short-term investments. On the other hand, choose diverse instruments for a portfolio comprising different assets to negate the possibility of investment risks while ensuring predictable returns. 

Conclusion 

Make an informed choice to make the best of your financial planning now that you have gained sufficient insight into India’s various small investment plans. Saving is ideal when you are young, allowing you options in the short-term and long-term for growing wealth to meet your financial objectives. Nevertheless, making investment decisions too soon can be counterproductive.  So, choose diverse investment plans with thorough research and keep in mind your financial goals. 

Frequently Asked Questions

Which is the best short-term investment for tax benefits?

All short-term investment options have tax implications, but the PPF offers the best tax-saving opportunity. Not only is your investment in the scheme exempt up to Rs.1.5 Lac under Section 80C, but the entire investment cycle is tax-free under the EEE (Exempt-Exempt-Exempt) regime. So, PPF can be considered as one of the best short-term investments for tax benefits.

What role do ICRA and CRISIL play in influencing Corporate Deposits?

In the absence of DICGC cover of Rs.5 Lac extended to bank deposits, ICRA and CRISIL ratings are crucial for investors looking for higher investment returns. So, “AAA” marked company fixed deposit schemes by ICRA and CRISIL are the preferred options. The triple “A” rating from these agencies signifies high safety and low-risk investment options. 

What are the factors for selecting short-term investment products?

Consider the following factors while selecting the investment instruments that best match your requirements: 
a) Safety of investment capital: Government-sponsored schemes and bank deposits are the safest options.
b) Liquidity of the investment: SIP and Liquid Mutual Funds are the most liquid among the discussed schemes.
c) Return potential on the investment: The return potential is highest in the mutual funds with asset allocation in market instruments. 

What are the short-term goals you can think of before investing?

You can classify short-term goals into three types depending on their duration.
a) Emergency: Up to 3 months to provide for sickness, home repairs, and essential expenses.
b) Ultra-Short: Between 4 and 12 months to fund education fees, advance tax, and buying expensive gadgets.
c) Short-Term: Between 1 and 3 years to meet vacation expenses and home renovation. 

Does any exit load apply to Liquid Mutual Fund on redemption?

No exit load applies to the redemption of Liquid Mutual Funds, provided it is after 7 days from the investment date. 

Which is the best investment for the short term?

The best investment for the short term is typically liquid mutual funds due to their liquidity and decent returns.

Which are the top short term investments funds to invest in 2023?

The top short-term investment funds in 2023 would depend on the market dynamics; it’s advised to consult a financial advisor or research recent market reports.

How long is short-term investment?

Short-term investments are usually considered those that last for a period of up to 1-3 years.

Which mutual fund is best for short term?

The best mutual fund for short term varies year-to-year; it’s recommended to check the latest ratings and performance data.

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Anuj Agarwal

Investment Principal
Anuj is an investment professional with a demonstrated history of working in Debt Capital Markets. He has completed his B.Com (Hons) in St. Xavier’s College, Kolkata and holds PGDM (Finance) degree from GIM. He is currently working as Investments Principal at Wint Wealth. He has been working in the debt capital market space for the past 4+ years and is also an NISM certified mutual fund expert.

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