Investments are of many kinds and the objective for each kind of investment is different, while mostly you relate investing with earning growth, the purpose of short-term investments is to keep your capital safe while at the same time giving you the most efficient return possible for the short period. This means you seek stability and the flexibility to sell at a short notice.
These restrictions limit the type of investments you can choose as well. First, let’s weed out what you absolutely should not pick for short term parking of money.
Equity stocks and mutual funds are flexible but, are too volatile when it comes to fulfilling for short term requirements. Volatility means that the price of your stocks or equity mutual funds can move up and down by an uncomfortable margin on a daily basis.
You can even see your capital decline in the early part of your investment period. However, over a longer period of time, the price of a stock or a portfolio like a mutual fund scheme depends on the quality of the underlying asset and the ability to grow earnings by that one company or the portfolio of companies. This value creation from equity assets, at a minimum, can take a few years.
You will be disappointed if you invest in equity for a short period of a few months, especially if you are looking to keep the money safe.
Even in high-quality bonds, there is an interest rate risk if they are listed on exchanges to give you the flexibility to exit when you want.
While bonds are considered as safe investments, issuers can default on bonds failing to pay interest and/or return your capital invested. They may also not have the flexibility for a quick sale. Thus, this category too is not suitable for your short-term parking of money. You may think that a bond issued by a highly rated company with good liquidity to sell when you want can help you get relatively safe returns and also an exit whenever you need, but there are other risks involved in such bonds.
Even in high-quality bonds, there is an interest rate risk if they are listed on exchanges to give you the flexibility to exit when you want. If interest rates are declining you can gain from selling your bond, but, if in the short period that you have invested for, interest rates were to rise, you can also lose money as the price of a listed bond will fall.
For short term investment needs, pick bonds where the left-over period or the time to maturity matches the period for which you wish to be invested. Debt funds are better fit for this though from a convenience and effectiveness point of view.
3. Government-backed small savings schemes
These refer to schemes like National Savings Certificate, Post Office Savings Schemes and Public Provident Fund. All these investments do tick mark the return and safety of return criteria; however, they are all long-term investments from which you can’t exit at will.
Most small savings schemes have a lock-in period of 5-7 years. In other words, these investments don’t qualify for the flexibility of withdrawing at any time and hence, don’t make for good short-term investments.
Stick to liquid and stable investments like liquid funds, ultra-short term funds and short term bank deposits for stability of return and flexibility to exit when it comes to your need for short term parking of money.