There may be times where one is in dire need of finances for a goal that is to reach its fruition in a year or two. It is also possible that there is some uncertainty regarding the same, but there is no scope of taking the risk of not having liquid funds at your disposal. It is during these times that investors often resort to planning their investment for the short duration using highly liquid funds with lesser risks attached to it. Wish to know more about these? Read on to find out!
What is an Investment Plan?
An investment plan is a financial blueprint that defines the financial goals of an individual as well as the means to achieve them. It breaks one’s financial goals into time bound goals and ensures that the financial goals are aligned with one’s personal goals.
Short Term Investment Plans
The major objective of short-term investment plans that last for a period of one year is to have capital protection while generating good returns on investment. These investments are highly liquid and they have their specified maturity date to be less than one year.
Why Must One Resort to Investing in 1 Year Investment Plans?
Some of the prime benefits or reasons for investing in 1-year investment plans are given below.
These investment options provide returns at lower risk in comparison to other volatile options like equity. Therefore, they are more suitable to meet short-term goals of a 1-year time horizon than investing in pure equities.
Investment options with a one-year time horizon do not come with heavy lock-in periods and therefore are easily liquidated upon maturity or meeting of the financial goal.
The returns from investments with a 1-year time frame may not provide exponential returns but they are nevertheless more or less stable as they are not subject to extreme market or economic volatility.
Safety of corpus
The prime benefit of investing in short-term investment plans for 1 year is the safety of corpus. These plans are low-risk plans with stable returns and being able to access their corpus at the most opportune time allows them to meet their desired financial goals.
7 Best Investment Plans for 1 Year
In order to derive high returns in a short span of one year, the following investment options can be resorted to –
Debt mutual funds
Debt mutual funds are ideal short-term and safe investment options attracting risk-averse investors. These funds offer higher returns as the corpus is invested into stable and secured debt instruments like high-rated corporate bonds, treasury bills, and government securities. The maturity period of short-term debt funds can be up to one year and they are quite liquid enabling investors easy redemption of units. These are further categorized as low-duration funds and money market funds.
Arbitrage mutual funds
Arbitrage mutual funds are a type of mutual fund that invests in stocks and derivatives to take advantage of price discrepancies between the cash and derivative markets. It leverages the price differential that exists in the cash market and derivatives market to generate returns. Similar to debt funds, the risk of investment is relatively lower as compared to investment in equity funds and they can provide tax benefits if held for a period of 1 year or more.
If one seeks to bring financial discipline into their investments and place a fixed sum regularly with the bank, then recurring deposits are a good investment option. At the end of the tenure, the investor will be given a lump sum amount of the principal plus interest which is marginally higher than the savings bank account. The investment can be made through online and offline modes.
Fixed deposits are one of the most popular short-term investment options in India. They offer a secure plan with a varying interest rates depending on the bank or the NBFC. Fixed deposits can be made for investment periods ranging from 6 to 12 months and investors have the option of choosing a month-to-month, quarterly, half-yearly, yearly, or cumulative interest.
Fixed maturity plans
With investments majorly locked into fixed-income securities, fixed maturity plans are not impacted by the volatility of the interest rates in the market. The maturity period of this debt mutual fund ranges from one month to five years. These are indexed on stock exchanges and the liquidity is low. The gains made may be taxed at applicable slab rates in the case of STCG or at 20% with indexation benefits in the case of LTCG.
Post office term deposits
Post Office Time Deposits offer a fixed rate of return for different tenures ranging from 1 year to 5 years. The interest rates on POTDs are paid annually but are calculated on a quarterly basis and the returns are guaranteed by the Government of India. The interest income is taxable in the hands of the investor at their applicable slab rates.
Liquid funds are open-ended debt funds with low risk that offer the investor a return at an average of 7 to 9%. These liquid funds invest in money market instruments such as term deposits, commercial papers (CP), and T-bills, and have a maturity period ranging from 3 to 6 months. The returns provided are higher than even fixed deposits and hence, these are an attractive option for the investor to invest in.
One has the option of choosing between market-linked investment options and fixed income options. A judicious mix of the two will prove to be more profitable than putting all the eggs in one basket. Invest smartly, keeping in mind your financial objectives, time horizon, and risk level, to make the most of what you have!
Frequently Asked Questions
- What are the risks involved in investing for a period of one year?
Market-related risks, liquidity risk, concentration risk, horizon risk, and foreign investment risk are the most common types of risks involved while investing for a time period of one year.
- Which mutual fund is ideal for the short term?
Large cap mutual funds are ideal for the short term as they provide high returns.
- What are the investment hazards that one has to be mindful of?
The perils that one might encounter while investing is –
- Impulsive investing with little information at hand,
- Not monitoring the investment once the initial amount has been paid,
- Investing not keeping a clear investment goal in mind,
- Applying shortcuts to gain quicker results and taking undue risk in the process.