Short-Term Investments: Types, benefits, and other key details
Short-term investment refers to the investment in financial instruments for a short period of time. Financial instruments that are held for 12 months or less are considered short-term investments in India, and the resulting profit is short-term capital gain. Most of these investments are sold within a period of 3-12 months, and these are financial instruments that can typically be converted to cash easily.
The purpose of investing in short-term assets is usually for a quicker turnover of profits, as long-term investing requires capital to be locked in investments for extended periods of time.
Types of short-term investments
When an investor enters the market for short-term investments, there are multiple choices available, all with different pros and cons. Here are some of the popular short-term investment instruments:
These are financial instruments that are issued and backed by the Central Government, making them stable investments. Treasury bills are traded in the bill market and can be categorised into three types:
• 91-day treasury bills
• 182-day treasury bills
• 364-day treasury bills
The price of these treasury bills is designated through auctions, which usually generate moderate returns.
These are unsecured short-term debt instruments raised by companies to meet their short-term financial requirements. Commercial papers rarely come with a maturity of more than 270 days. These are usually not independent of market fluctuations, unlike treasury bills, but they also tend to provide higher yields.
Many stocks can also provide good returns in a shorter period of time, but they usually carry higher risk compared to other short term investments. Depending on your risk appetite, equity shares that are issued by mid-cap or small-cap companies can be considered as they usually have higher potential for returns but also carry higher risk.
Certificate of Deposit
A certificate of deposit is a financial product that is usually sold by banks, issued against a certain substantial deposit. Certificates of deposit are usually preferred in terms of short-term investments as they offer stability as well as comparatively higher returns than treasury bills, issued for a period ranging anywhere from 7 days to 1 year.
Benefits of short term investing
Some of the key benefits that short-term investments provide include:
High liquidity – Short-term investments usually benefit from high liquidity in the market, meaning these instruments can be easily converted to cash.
Flexibility – As these instruments do not lock up capital for long periods and have high liquidity, they offer higher flexibility to investors.
Short term profits – Within a shorter period of time, investors can make considerable profits as these investments often involve consistent returns and are also liquid, making them easier to convert to cash during good market conditions.
Short-term investment offers multiple alternatives to investors looking for quick turnover of profit. These can be balanced as part of your portfolio along with long-term investments. There are multiple benefits of short-term investment including higher returns, flexibility, and liquidity. However, there are also a few disadvantages like higher risk and high transaction costs, which require more research and expertise.
Q. Is short-term investing better than long-term investing?
Both types of investment have inherent benefits, and one can choose depending on your goals, you can choose between short and long-term investments. Factors to be considered include how long you are comfortable with your capital being locked up and the risk you can take.
Q. How do you pick what instruments to invest in?
This has to be seen from the lens of risk and return – for good returns and low risk, commercial papers or treasury bills are a good option. For higher returns with higher risk, equity shares are a good option.
Q. How do you identify shares to invest in for the short term?
One can easily identify which stocks to choose based on their beta coefficient. A high beta stock tends to be more volatile and thus carries a higher probability of profit but also a higher risk.
Beta is defined as the statistical measure of the relative volatility of a stock with respect to the broader market.
Like intrinsic value of a business indicates how much the business would be worth if all assets were sold, the intrinsic value of a share tells investors how much the shares are worth