Investing online for the short term can help you cater to big purchases or emergencies in the near future without breaking the bank or hampering your long-term investments.
That said, striking a balance between factors such as liquidity and returns becomes crucial. But where to park money for short term? Read on to know more.
What is Parking Money for Short Term?
When someone says they’re parking money for the short term, they simply mean “making short-term investments”.
Short-term investments are assets that can generate decent returns in a timeframe of 3 months to 3 years.
These investments are typically for emergencies, immediate goals, and pitstops in STPs.
Parking money for the short term is an effective way to keep cash at hand while generating a decent passive income source.
There are multiple short-term investments that you can make, especially when you think about the evolving nature of the Indian market.
Best Ways to Park Money for Short Term
If you’re wondering where to park money for the short term, then there are many options available.
What you need to know is that most short-term investments carry fixed returns or predictable returns.
Thus, short-term investments are not expected to be as lucrative as long-term investments. That’s why the best way to park money for short term is as follows.
1. High-Yield Savings Accounts
A high-yield savings account offers higher interest rates than normal savings accounts. This helps you earn better returns.
At the same time, the returns come with high liquidity as you can withdraw money from your account whenever you want.
- Returns: ~2% to 4% P.A.
- Liquidity: High
2. Money Market Funds
Money market funds are short-term mutual funds. They invest in debt securities and short-term government securities like commercial paper, treasury bills, etc.
Their maturity ranges from 3 months to 1 year. These funds are known to give relatively better returns as compared to bank deposits.
- Returns: ~4% to 7% P.A.
- Liquidity: Medium
3. Certificate of Deposits (CDs)
CDs are short-term investments that offer fixed returns. This predictable nature of CDs combined with the short lock-in tenure makes them a viable short-term investment.
The RBI governs CDs while it is issued by financial institutions. It can be issued at a discount provided at face value. You may have guessed that CDs function much like FDs.
- Returns: ~3% to 6% P.A.
- Liquidity: Medium
4. Treasury Bills (T-Bills)
These are short-term investment options in the money market. T-bills are issued as promissory notes with surety of payment in the future.
They are mainly issued for three types of tenure i.e., 91, 182, and 364 days, and issued by GOI. Thus, these instruments are also known as government securities.
Treasury bills are issued at a discounted rate and are redeemed at nominal value. In this way, you can earn returns through the difference amount.
- Returns: NA
- Liquidity: Medium
5. Short-Term Bonds
Short-term bonds are funds that invest in securities that have maturity periods ranging from one year to three years. They are very liquid.
Investments are made in commercial papers, certificates of deposits, and other government securities.
- Returns: ~4% to 6% P.A.
- Liquidity: Medium
6. Liquid Mutual Funds
Liquid funds are known to be one of the best funds to park money for short term. These funds invest in money market instruments maturing in 91 days.
They offer relatively better returns than bank savings accounts and can be on par with fixed deposits based on the prevailing market conditions and interest rates.
Most individuals invest in liquid mutual funds to build a contingency fund as it mixes decent returns with solid liquidity.
- Returns: ~2% to 4% P.A.
- Liquidity: Medium-High
Factors to Consider Before Parking Money
There are tons of short-term investment products available on the market. Use these factors to determine their worth before investing.
1. Liquidity
A liquid asset can be easily converted into cash. This is the entire promise of short-term investing – to have cash in hand with decent returns on top.
2. Safety
While no investment is 100% risk-free, it is important to gauge the actual risk carried by your short-term investment. If it’s too risky, it may hamper liquidity and principal safety.
3. Return on Investment
All things said and done, you need some incentive for parking your money in the short term. Whether it’s a bank or a liquid fund, evaluate the potential returns.
4. Accessibility
An investment may give 10% short-term returns but is it accessible to you? Can you withdraw the money tomorrow? These are the questions you need to ask yourself before parking money for the short term.
5. Fees and Expenses
Many financial products charge certain fees from the investor. For example, liquid funds levy fees from investors known as the “expense ratio”. Assess that the fee for your investment is not too high.
Pros and Cons of Parking Money for Short-Term
| Pros | Cons |
| Easily access funds when needed | Lower returns than long-term investment options |
| Less impact of market fluctuations | Varying returns due to changing interest rates |
| Convenient for changing financial goals or emergencies | Less time for the magic of compounding to work |
| Opportunity to diversify across multiple assets | Short-term capital gains may be subject to higher taxes |
| Suitable for protecting capital in volatile markets | Frequent withdrawals can lead to higher transaction fees |
| Less exposure to long-term market uncertainties | Returns may not keep up with inflation |
Factors to Consider Before Parking Money in Short Term
1. Your Risk Profile
Short-term investments can vary in risk levels. What you need to evaluate is whether that risk level matches yours.
Aligning the investment’s risk with yours can allow you to pick the right parking spot for your money in the short term.
2. Your Financial Goals
Are you saving for an emergency fund or a vacation? Depending on such short-term financial goals, pick a suitable short-term investment for better results.
3. Tax Considerations
Take into consideration what is the tax treatment on your investment. Short-term capital gains tax is levied on investments that are held for less than one year.
Conclusion
After going through this article, you have an idea about various investment options available for the short term.
You can choose the one that suits your needs and goals and start online investing using a platform like Dhan.
