Wealth creation is a time-consuming, patient process. But what about the money you need in 1-3 years?
Parking it in a savings account wastes the opportunity. Putting in equity is risky. This is where short-term investment plans help.
Let’s see what investment plan options work for near-term needs and how they fit your overall strategy.
What Are Short-Term Investment Plans
Short-term investment plans are products designed for investments of 1-3 years.
Key features:
Money doesn’t stay locked forever. Returns are modest but safer than equity. Liquidity is better than long-term products. Risk is lower than the stock market.
Common examples:
Fixed deposits for 1-2 years. Debt mutual funds. Liquid funds. Short-term bonds. Recurring deposits.
These aren’t for retirement or a child’s college. They’re for goals arriving soon.
Why You Need Them
Your financial strategy needs different investment plan types for different timelines.
Long-term (10+ years):
Equity mutual funds, ELSS, NPS, and PPF. These build wealth but need patience.
Medium-term (5-10 years):
Balanced funds, debt funds, and bonds. Moderate growth with manageable risk.
Short-term (1-3 years):
FD’s, liquid funds, short-duration debt funds. Safety priority over high returns.
Emergency (anytime access):
Savings account, liquid funds. Immediate availability matters most.
A complete financial strategy uses all these layers. Short-term investment plans fill a crucial 1-3 year gap.
Common Short-Term Goals
House down payment in 2 years:
Saved 15 lakhs. Need it safe till house purchase. Can’t risk equity fall.
Child’s school admission next year:
10 lakhs arranged for admission and fees. Must be available when needed.
Business expansion in 18 months:
Accumulated capital for shop renovation. Timing is fixed.
Car purchase in 1 year:
Sold old car, money sitting in the account. New car delivery expected next year.
Wedding in the family:
Sister’s marriage is planned 20 months away. Expenses known, timing certain.
For all these, short-term investment plans work better than a savings account or equity.
Types of Short-Term Investment Plans
Fixed Deposits:
Safest option. Banks and post offices offer. Tenure 1-3 years.
Returns: 6.5-7.5% currently. Guaranteed, no risk.
Lock-in: Breaking early has a penalty. But possible in an emergency.
Best for: Absolute safety seekers. People are uncomfortable with any market exposure.
Debt Mutual Funds:
Invest in bonds and fixed-income securities. Various categories available.
Liquid funds: 1 day to 3 months. Ultra-short duration: 3-6 months. Short duration: 1-3 years.
Returns: 6-8% typically. Slightly better than FDs.
Taxation: More tax-efficient than FDs after 3 years.
Best for: People okay with tiny fluctuations for better post-tax returns.
Recurring Deposits:
Monthly deposit scheme. Banks offer 1-3 year RDs.
Returns: Similar to FDs, 6.5-7%.
Discipline: Forces monthly saving automatically.
Best for: People saving gradually, not lump sum.
Sweep-in FDs:
Linked to savings account. Excess money automatically moves to FD.
Returns: FD rates on excess, savings rate on needed amount.
Liquidity: Automatic sweep back when needed.
Best for: People wanting both liquidity and better returns.
Arbitrage Funds:
Low-risk mutual fund category. Exploits price differences across markets.
Returns: 6-7% typically. Taxed like equity funds.
Risk: Very low but not zero.
Best for: Knowledgeable investors wanting equity taxation benefit.
Comparing Returns
For 5 lakhs invested for 2 years:
Savings account (3.5%):
Maturity: 5.36 lakhs. Gain: 36,000. Fully taxable.
Fixed deposit (7%):
Maturity: 5.72 lakhs. Gain: 72,000. Interest is fully taxable. After 30% tax: Gain reduces to 50,000.
Debt mutual fund (7.5%):
Maturity: 5.78 lakhs. Gain: 78,000. Taxed as per the slab. After indexation, the benefit is held for 3 years, with a much lower tax.
Liquid fund (6.5%):
Maturity: 5.67 lakhs. Gain: 67,000. Taxed as per the slab.
Post-tax returns matter. Debt funds often win due to indexation benefit after 3 years.
How They Fit Overall Strategy
Short-term investment plans are one piece of the complete financial picture.
Sample balanced strategy:
Protection layer: Term insurance 1 crore. Health insurance family floater.
Emergency fund (0-6 months need): 3 months’ expenses in a savings account. 3 months in a liquid fund.
Short-term goals (1-3 years): Money for a house down payment in a short-duration debt fund. Car fund in FD. Wedding fund in sweep-in FD.
Medium-term goals (5-10 years): Child’s school fees in balanced funds. Home renovation fund in debt funds.
Long-term goals (10+ years): Retirement in NPS and equity funds. Child’s college in equity funds.
Each goal is matched with an appropriate investment plan based on the timeline. Short-term investment plans handle near-future needs safely.
Common Mistakes
Mistake 1: Equity for the short term
Need money in 1 year, put in an equity fund. Market crashes 15%. Goal suffers.
Never use equity for needs within 3 years. Too risky.
Mistake 2: All in savings account
10 lakhs, sitting for 2 years at 3.5%. Losing 3-4% yearly to better options.
A savings account is only for an immediate emergency fund.
Mistake 3: Not matching the timeline
Money needed in 6 months, locked in a 3-year FD. Breaking means a penalty.
Match investment plan tenure with the goal timeline.
Mistake 4: Ignoring taxation
Choosing an FD over a debt fund without calculating post-tax returns.
Always compare after-tax returns, not gross returns.
Mistake 5: No emergency buffer
All money is locked in short-term investment plans. Emergency comes, forced to break.
Keep a separate emergency fund always accessible.
Tax Efficiency Matters
FD taxation:
Interest is fully taxable as per the income slab. TDS is deducted if the interest exceeds 40,000 yearly.
In 30% bracket: 7% FD return becomes 4.9% after tax.
Debt fund taxation:
Held under 3 years: Taxed as per the slab. Held over 3 years: 20% tax with indexation benefit. Indexation often reduces taxable gain significantly.
Arbitrage fund taxation:
Taxed like equity. Over 1 year gains get 12.5% tax above 1.25 lakhs.
More tax-efficient than FDs for higher bracket taxpayers.
Choose an investment plan considering the taxation impact on your returns.
Safety vs Returns Balance
Short-term investment plans trade high returns for safety.
Safety priority:
Goal just 1 year away? Safety 90%, returns 10% priority. Use an FD or liquid fund.
Balanced approach:
Goal 2-3 years away? Safety 70%, returns 30%. Can use short-duration debt funds.
Slight risk acceptable:
Goal flexible by a few months? Consider arbitrage funds for better tax-efficient returns.
Your comfort and goal criticality determine the risk you take, even in short-term investment plans.
Taking Action
Identify your 1-3 year goals. Calculate amounts needed. Match each with an appropriate short-term investment plan.
House down payment? Short-duration debt fund. Car purchase? Fixed deposit. Wedding fund? Recurring deposit building to target. Use the right investment plan for right timeline.
Short-term investment plans have their place. Your complete financial strategy needs both. Safety for the short term. Growth for the long term. Protection throughout. Build this balanced approach today.
