Financial planning, a whole lot of the instances, is about investing for the long term. However, there are numerous needs for short term investment plans and that need to be met in a short time period.
Individuals make investments for the shorter durations primarily because their purpose is near or they don’t wish to take the danger of locking off their cash for an extended tenure. Though there is no such thing as a single defined interval for short-term investments, anything from 7 days to lower than 12 months can qualify as short-term.
Fixed-income investments include tenures within the vary of 7 days to 12 months. A few of the widespread fixed-income products that can be utilized for short-term investing embrace fixed deposits (FDs), firm deposits, post office term deposits and so forth.
Here’s a look at each in terms of tenure, returns, liquidity, and taxation.
1. Bank fixed deposits
Tenure: A bank FD is a protected alternative for short-term investment. FDs include numerous tenures starting from 7 days, 14 days, 30 days, 45 days to a year and even as much as 10 years. Totally different banks have completely different periods of deposits. Such deposits may even be renewed on maturity and therefore, funds could be reinvested if the necessity is just not there. Under the deposit insurance and credit guarantee company (DICGC) guidelines, every depositor in a bank is insured as much as a maximum of Rs 1 lakh for each principal and interest amounts. Most banks will let you put money into an FD on-line.
Liquidity: Some banks could provide deposits that do not permit untimely withdrawals. As an alternative to locking funds for a selected period, an investor could unfold the quantity through completely different maturities through ‘laddering’. It not only offers liquidity to funds but additionally manages the ‘re-investment threat’. When the shortest-term FD matures, renew it for the longest length and proceed with the method as and when numerous FDs get matured. One could even make investments for an extended interval and in case of need, withdraw prematurely, by incurring a penalty. If the necessity does not come up, the interest could be continued to be earned.
Returns: As per the necessity, one could go for month-to-month, quarterly, half-yearly, yearly or cumulative interest choices in them. The rate of interest that banks provide is considerably aligned to the Reserve Bank of India (RBI) repo rate and therefore the financial institution’s personal value of funds. At present, it’s around 6.5 % each year for a tenure of 12 months and above. Senior residents get an extra 0.5 % on their deposits.
Taxation: The rate of interest earned is added to at least one’s income and is taxed as per one’s income slab. If the interest earned is greater than Rs 10,000 a year throughout all branches of the bank, there’s a tax deduction at source (TDS) by the financial institution.
Tenure: In contrast to bank FD’s, the firm deposits are unsecured deposits and subsequently carry a higher threat. In case of a default, the depositors have the final right on the firm’s asset. Each, manufacturing firms and non-banking finance companies (NBFCs) challenge such deposits however it’s only the previous who has a short-term deposit choice. Firm deposits provided by NBFCs include tenures of more than one year.
Liquidity: Though, untimely exit is allowed, it is on the firm’s discretion to honour it. Additionally, there are penalties in place relying on the tenure the deposits are held earlier than applying for giving up.
Return: The rate of interest on these deposits perhaps 1-2 % increased than bank FD however the threat of dropping your entire principal and not just the interest is excessive, even when the deposits carry excessive scores. As per the necessity, one could go for month-to-month, quarterly, half-yearly, yearly or the cumulative interest choice. At present, most such deposits are providing around 7.5 % each year.
Taxation: The rate of interest earned is added to at least one’s income and is taxed as per one’s income slab. If the interest earned is greater than Rs 5,000 a year throughout all branches of the corporate, TDS can be lower by the corporate.
Post office time deposits
Tenure: One can put money into post office time deposits that have tenures of 1, 2, 3 and 5 years.
Liquidity: The interest in case of time deposits are annual. The untimely withdrawal of a time deposit is just not allowed earlier than the expiry of six months. One could give up the deposits after that, nevertheless, the amount of interest recovered in case of untimely withdrawal of the deposit will probably be at a lowered rate of interest.
Returns: As soon as invested, the returns are fixed and assured with sovereign assure for your entire interval. For the short-term, one could put money into a 1-year time deposit where the interest is payable yearly, however, calculated quarterly. Each quarter, the rates are re-set by the government which applies solely on fresh investments made in that quarter of the year. At present, the rates are 6.9 % to 7.7 % for 1-5 year time deposits.
Taxation: The rate of interest earned is added to at least one’s income and is taxed as per one’s earnings slab.