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When you want to invest for one year, it needs a mix of capital safety and liquidity. The intention of searching for the best investment plans is to earn returns during the investment horizon, either short or long term. For investing for one year, you cannot choose an equity fund or hybrid fund as these funds are very volatile. Also, considering debt funds, you cannot choose long term holdings due to the interest rate risk. Therefore, the options are very limited while investing for one year. This article will discuss the Best Investment Plans for 1 Year. 

PlansBest ForIdeal Duration
Liquid FundsAlternative to savings account0-3 months
Ultra Short Duration FundsParking excess money3-6 months
Low Duration FundsSTP 6-12 months
Money Market FundsExposure to money market instruments1 year
Arbitrage FundsExposure to equity market in short term1 year
Floater FundsShort Term Investment1-3 years
Fixed DepositsRisk Free Short Term Investment7 days – 5 years

1. Liquid Funds – Best Alternative to Savings Accounts

Liquid funds typically invest in debt instruments that yield a predictable return and mature in 91 days. These underlying securities are of high credit quality. They are money market instruments like t-bills, certificate of deposits and commercial papers with 91 days of maturity. The NAV of these funds is calculated for 365 days. These funds are highly liquid and do have any entry or exit loads. 

The holding period for the securities is concise, and hence there is no risk associated with these funds. However, the fund value might drop significantly when the underlying asset’s credit rating is suddenly downgraded. This implies that liquid funds are not entirely risk-free. They are best suited for short term money and offer higher returns than bank savings accounts. Therefore, you can park your idle funds lying in a bank account in these funds to earn better returns. 

Funds To Look:

Recommended: Explore Best Liquid Funds to Start Investing

2. Ultra Short Duration Funds – Best for Parking Excess Money

Ultra-short duration funds are sometimes also known as ultra short term funds. These schemes are debt funds where the fund’s portfolio invests in securities with a maturity period between 3-6 months. It invests in securities like money market instruments or fixed income securities like treasury bills, commercial papers and certificates of deposits with maturities below six months. 

Moreover, these funds provide reasonable returns with sufficient liquidity. The underlying securities have low maturities, making the fund less sensitive to market movements. 

Generally, this fund is suitable for investors who want to park their excess funds for up to 6 months. Consequently, if the fund manager’s strategy is to invest in low credit quality securities with an expectation that they would upgrade in the future, it exposes the fund to credit risk.

Funds to Look:

3. Low Duration Funds – Best for STP

Low duration funds are debt funds that invest in securities with maturity between 6-12 months. Unlike liquid funds or ultra short term funds, low duration funds hold assets of longer duration and lower credit quality. Therefore, these funds have higher interest rate risk and credit risk. Moreover, these funds tend to outperform liquid funds as they allow them to take on greater credit and duration exposure. 

Low duration funds can be an alternative to fixed deposits as they can enter and exit anytime. These funds are suitable for low-risk investors for short-term financial goals for up to 6-12 months. Furthermore, you can invest in these funds for Systematic Transfer Plans (STPs). Instead of investing a lump sum amount in equity funds, you can invest in a low duration fund and use STP to transfer a certain amount of money to an equity fund. This way, you can earn returns on debt fund investment.

Funds to Look:

4. Money Market Funds – Exposure to money market instruments

Money market mutual funds invest in securities with a maturity period of around one year. This fund invests in the certificate of deposits, commercial papers, treasury bills, and repurchase agreements. In other words, the investments are generally in fixed income-generating securities. This is why these securities are called money market instruments

Money market instruments are highly liquid as they have short maturities. They are also highly secured as the issuers of these instruments have a strong credit rating. Also, there is no credit risk like low duration funds. Hence investors can consider these funds to manage short-term cash needs for one year. However, these funds do not guarantee returns, but the returns are predictable. Moreover, the returns are higher than bank fixed deposits allowing investors to make money from the surplus cash.

Funds to Look:

5. Arbitrage Funds – Exposure to equity market in short term

Arbitrage funds are a type of equity-oriented hybrid mutual fund that profit from the difference in pricing of securities in two different markets. The securities are bought at a lower cost from the cash market and sold at a higher price in the futures market. The difference is the profit earned through arbitrage. Therefore, arbitrage funds perform well in a fluctuating market. However, these funds cannot take such opportunities during a stable market. They invest in bonds, splitting the asset allocation between two asset classes. 

The difference in pricing in the cash and futures markets is significantly less. These funds invest in many opportunities per day to make profits. The tax for equity arbitrage funds is similar to equity mutual funds. Arbitrage funds are best suited for investors looking for equity exposure for the short term. The risk profile is similar to debt funds. Therefore investors seeking returns from volatile markets can invest in these funds through the SIP or lumpsum route. 

Funds to Look:

6. Floater Funds – Best for Short Term Investment

Floater Fund is a debt fund that invests more than 65% of its total assets in floating rate instruments. A floating rate instrument can be corporate bonds, debt instruments or loans from companies with variable or floating interest rates. In other words, the floater funds do not have a fixed coupon rate.

Any change in the repo rate by the Reserve bank of India (RBI) affects the interest rate of any debt instrument. Every floating rate debt instrument has a specific benchmark. However, the interest rate of these instruments changes in accordance with a change in the benchmark rate.
As the market lending repo rate increases, the interest rate of these floater funds also increases and vice versa. This change is reflected in the NAV, allowing investors to earn higher returns. Therefore, this fund aims to benefit from the fluctuating interest rate scenario. You can invest in floater funds when the interest rates are rising in the country. 
Floater funds have credit risk attached to them as there can be default payment of underlying security. It is essential to analyse the country’s market economy before investing in these funds. Hence, investors can match their short term goals for one year and take advantage of the rising interest rate scenario. 

Funds to Look:

7. Fixed Deposits – Best Risk Free Short Term Investment

A fixed deposit is a traditional financial instrument offered by banks, post offices or NBFC (Non-Banking Financial Company). A lump sum is deposited in a bank fixed deposit for a specific period ranging from 7 days to several years at a predetermined interest rate. The fixed deposit interest rate offered is higher than the regular savings account. 

Fixed deposits are safe investment instruments where investors can choose to invest and decide the investment tenure based on their financial goals. They offer guaranteed returns on investment. Hence, investors seeking to earn assured returns without any risk can invest in fixed deposits. It offers capital protection and regular interest to meet monthly expenses. You can easily withdraw from your FD account. However, breaking a fixed deposit before completion of its tenure is subject to certain charges. 

Schemes to Look:

Recommended: Compare FD Interest Rates for All Banks

Things To Remember While Investing For 1 year

The following are the factors to consider while investing for 1 year – 

  • Risk: The risk of short term investments is lower than the long term investment options because of the short term maturity time frame. However, with a list of investment alternatives for investment plans for 1 year, some instruments are unsafe than others. For example, a fixed deposit is a safer investment option than any debt fund because it offers assured returns. 
  • Diversification: This is one of the most critical factors you should consider while investing. However, investment plans for 1 year do not provide many alternatives where you can change your investment within a short span of time. Also, the amount invested is not tied up as in the case of a long term investment plan where you can invest to earn returns from other alternatives. Therefore, with the limited options, based on your investment objective, you can consider investing in some investment plans.
  • Liquidity: One of the best features of short term investment instruments for 1 year is that they are highly liquid, and you can withdraw anytime. For instance, you can park your excess savings account surplus in liquid funds where you can withdraw your money immediately. The money will be credited to your bank account immediately up to a specific limit. Beyond that takes T+1 days. Similarly, these short term debt funds take up to T+1 days for the money to reach your bank account. 
  • Flexibility: Flexibility is another crucial factor to consider while investing for 1 year. Generally, the money invested for 1 year is less when compared to a long term perspective. This allows investors to invest the extra sum of money in other alternatives. Also, this helps to build a diversified portfolio where not all money is invested in a single alternative. 
  • Tax Efficiency: Since the holding period for these debt funds is less than three years, short term capital gains (STCG) are applicable where the profits are taxable as per your income tax slab rate. Also, it would help if you calculated the post-tax returns from your investment to understand how much profits you earn with your earnings slab. Therefore, it is essential to evaluate the tax efficiency of the investment alternative while choosing the best investment plans for 1 year.

To sum up, it is essential to understand the immediate short term goal while picking the best investment plan for 1 year. Also, understanding the post-tax return or the profits you receive keeping in mind your tax slab rate. 
Furthermore, since the time horizon is less than 12 months, selecting a safe investment option is better where the risk of losing capital is minimal. Therefore, prioritising safety for the short term is better than investing in risky instruments. 

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