When it comes to investing for the long term, you may find several investment options. Even if you make a wrong choice while selecting a long-term investment asset, you always have sufficient time to do the correction. On the other hand, when investing for the short term, you need to be more cautious compared to the long term because you don’t have much time in hand to recover from the losses.

People choose short-term investments to meet their short-term goals such as to meet travel expenses, for paying child’s school fees, as a contingency fund or for parking the temporary cash in hand lying idle. As you look to park the fund for a short-term period, the focus should remain on getting a decent return on investment and keeping the risk low at the same time. Here’re some of the best short-term investment options available in the present market.

High-interest savings account

Usually, it’s not a good idea to park your money in a savings account because the interest offered is much lower than the fixed deposits (FDs), but there are some banks in the market which offer very attractive interest on their savings account. The interest rate may range around 5% to 6% per annum for balances above Rs 1 lakh and up to Rs 10 lakh, whereas more than 6% for deposits above Rs 10 lakh. Most of the banks offer an interest of around 3% to 5% on balances up to Rs 1 lakh.

The advantage of parking your fund in a high-interest savings account is that it offers excellent liquidity, and the interest is calculated on a daily basis.

Also Read: How to Grow Your Savings: A guide to financial stability

Liquid Fund

Liquid funds are debt funds, highly popular amongst investors who often receive a large amount of money in their account but for a short duration. Keeping such money idle in a current account doesn’t make any sense. So, deploying such a corpus in the liquid fund can offer a decent return on investments and allow flexibility to withdraw the money whenever there is a requirement. There is no exit load on the liquid fund if the corpus is withdrawn after 7 days. It’s important to note here that a return earned on the liquid fund is taxed at your applicable income tax slab rate.

You can choose to invest in the liquid fund for a hassle-free return and quick redemption process.

Arbitrage Fund

Do you know, there are equity funds in which you can invest money for the short term and earn a very good return while taking a low risk similar to the debt fund? That’s true. You can invest in the arbitrage fund that carries a lower risk than other regular equity instruments. An arbitrage fund earns its profit by capturing the gap between the equity cash and the future market. The fund manager usually takes a hedged position by simultaneously buying in one market and selling in another market and squaring up the position at the same time.

Tax treatment of returns earned from arbitrage funds is similar to regular equity instruments. You can get better tax efficiency on return from arbitrage funds compared to other short-term investment avenues like liquid funds, FDs or a savings account.

Adhil Shetty, CEO, Bankbazaar.com, says, “When venturing into shorter-term investments, investors must prioritise two fundamental aspects: risk appetite and financial objectives. Dipping into the market without a clear understanding of these factors could lead to potential pitfalls. Assessing risk tolerance ensures that the selected investment aligns with the individual’s comfort level, minimizing the chance of panic-driven decisions during market fluctuations.”

“While the allure of higher returns may be enticing, investors should carefully weigh potential rewards against the associated risks. A balanced approach entails diversifying investments across multiple asset classes, spreading risk, and creating a buffer against market volatility,” adds Shetty.

While selecting investment options for the short term, it is crucial to consider your risk appetite and financial goals. It is advisable to diversify your investment across multiple asset classes in order to mitigate risks. Factors such as capital protection, returns, tax efficiency, and your risk profile, along with your financial goals, should all be considered when choosing a short-term investment instrument.