Neither man nor money can sit still. Man has to grow intellectually and money has to multiply. Be it any businessman, from Ratan Tata to a simple coconut trader, he will have a reserve to meet unprecedented disasters. This reserve which has conventionally been in the form of savings, is migrating towards an investment. There is only a subtle difference between the two; an investment plan is more lucrative than a savings plan. Investments can be for a short term or long term.
Short term investments are funds invested in securities that are intended to be held for a year or less. Examples include marketable securities, commodities, money market instruments, and options. The return on short-term investments may come in the form of financial income (like dividend income, interest income) and/or capital appreciation over time. From what has been said, it is clear that short term investments can also be defined as those which can be liquidated fairly quickly. For example, the quoted type of investments namely stocks and bonds can be turned into cash immediately or comparatively quicker than investment in land and plots. Short term investments are opted when one anticipates a pressing need for money in the near future (in about a year), like a down payment for a house intended to be bought in a year. Moreover short term investments can also be used as an alternative for the traditional savings account since it provides a much higher return.
Alike long term investments where diversification of investable money is suggested, here it is advisable to invest all the money in one particular investment plan so that the returns are quite high, provided the investment plan is reliable. There are many short term investment options. Of course the first one which comes to everyone’s mind is mutual funds. It is fundamentally an investment in partnership with someone else. Investors pool their money together to buy stocks, bonds, or any other investments. It is the suggested mode of investment for a layman, an amateur to investment.
Known as liquid fund, a money market is an example of one of the good short term investment options. Money market fund is a specialized form of mutual fund where the investment is in extremely short-term fixed income investments and where the interest rates are higher than traditional savings accounts, but they limit the access to the money for a period of time during which the money is earning accrued interest. However their rates of return are lower than that of bank fixed deposits.
Investing in gold and silver when the price is low and then selling it when the price is high is another type for a short term investment. The basis of this method is that both gold and silver change quickly, and then find a time period when the rate is low, and then hold the gold shares until the rate goes up. Greater the money invested, lesser is the required swing of gold value for the investment to be lucrative.
Companies make use of the Fixed Deposits as means to borrow money from the investors. However, investment in FDs is encouraged only if one has surplus funds to meet one’s emergency needs for more than 12 months. Risk is the most important element that remains in FDs and this is even more when it comes to the non finance companies. The reason behind this is that the non finance companies need not get credit rating for the instrument. Companies also issue other financial instruments like bonds and debentures are the other fixed-income instruments which are traded both in the primary and secondary market Since they are traded in secondary market, there are discrepancies associated with the transfer process and delivery of returns, hence primary market (direct investment with company) is advisable for large sums and naïve new entrants.
The advantage of short term investments are that you oculd make money for the immediate needs that are urgent and needs top priority. Unlike long term loans, access to the money is possible in a few short years. However, there are associated drawbacks with short term investments as well. One of the cons is that the short term investments that carry high interest rates are often high risk type accounts. This means that one stands to lose money. Less risky options have lesser interest rates. Besides the above there is one problem with the short term investment. In some of the cases if you liquidate them much before its expiry date then you may be asked to pay some penalty charges.