As per the Internal Revenue Services (IRS), short-term investment consists of current accounts of a company or a person which mature, expire, liquidate or reach an end at the lapse of a time period, of not more than 12 months. Now this may be the official definition, but for us, it simply means, an investment vehicle that has a shorter time period of maturity and liquidity, anywhere between 1-5 years and 7 in some cases. Since we have cut down the time period of the investment to a short-term, the number of investment channels has considerably dropped down. However, the ones that are short-term in nature are diverse enough.
Characteristics of Short-Term Investments
The following are some of the common characteristics and common traits of investments for a short period.
- Such investments, on an average, have a time period that spans from 1 to 5 years and in some cases, even 7 years.
- Such investments have an average rate of return of about, 5% to 9%, with most investment channels providing about 6%. Other than that, the return on investment for shares, options, commodities and bullion is unpredictable; it can be more than 100% or it may even be negative at times.
- These investment options usually have a one-time payment or for a few of them, this would be your initially invested principle.
- Investments can be segregated into high-risk investments and medium-risk investments. There are a very few selected ones, that offer a zero risk of return.
- Last, but not the least, rule of thumb is that, the more you invest, the better would be your return on investment and the net asset value, if you invest smartly of course.
- It must be noted that really short investment funds do not offer a guaranteed minimum return clause, and instead the returns depend completely upon the portfolio, market and economy performance. An example is mutual funds.
- In case of longer time periods, such as 5 to 7 years, a guaranteed minimum return clause is added, meaning that you will get back all your principle invested amount, plus a return on investment of about 5-7% and in addition to that a bonus, which depends upon the portfolio, market and economy performance.
- The loading charges and commission charged on these investments is usually very low, up to 1-2%, though in some cases, it might go up by about a couple of numbers, but on the whole, it would remain low.
The following are some of the most important and best avenues where you can 'park' your investments for a short time period. Take a look:
High Risk Short-Term Investments
High risk investments are the ones where a human error or mistake in your calculation or any other error in judgment can cause you to lose the entire sum. However, at the same time, a great decision of purchase can make a hefty profit for you.
- Stock Market: A stock market is a great place to make a very risky but calculated profit. Enter at your own risk, as the probability of losing money is high. Hence daily research and update on the stocks in which you invest in is necessary. I would also recommend you to ignore the 'more the better' rule in this one. In the volatile market scenario, that could characterize 2012, only invest in solid stocks, which have a sound financial basis.
- Bullion: The second brilliant option is gold or silver bullion. Such bullion can be purchased in government minted form and can also be brought in the form of certificates. Just like in the case of stocks, you will need to watch the sale and purchase price. However, right now gold has peaked already and is falling rapidly as of now. It's a seller's market right now, wait to invest in gold, till the price has fallen down enough and start rising again.
There are some investments in form of funds and schemes where all you have to do is put in your investment, sit back and enjoy. What makes these investments great is the fact that they are managed by leading funds managers and the returns are fixed and assured till a certain extent. Apart from that, there is profit sharing and bonus benefits which depend upon the performance of the portfolio, markets and the general economy. The better the performance of the economy, the better are the returns that you would receive.
- Funds: There are some professionally managed funds such as common mutual finds, annuity contracts, Short-Term Investment Funds (STIF), Collective Investment Schemes (CIS), etc. All you need to do is invest some money into these plans, sit back and enjoy the returns. The best thing about these investments is that they have a pretty good, fixed rate of return over investment. Apart from that, you also have the benefit of bonus and profits gained by a very well performing portfolio. The drawback is that the sum that you would need to invest is pretty large.
- Debentures and Bonds: Apart from share and common stock, companies and corporations also use some instruments and securities such as bonds and debentures. Both these bonds and debentures are 'i-owe-you' instruments wherein, you would have to deposit certain amounts with the company and let the interest accumulate on it. The entire sum is then returned upon maturity. Note that some of these securities are publicly traded through stock exchanges.
Now these are the ones where there is no or very low risk involved. Such investments are generally granted and generated by government and recognized banks.
- Government Provided: The best government granted investment channel for investing for a short period are government bonds, which are issued by state, and federal government and in some cases by departments such as treasury and defense. These bonds and certificates have a time period of about 5 years and they tend to offer really good return on investment.
- Bank Provided: Bank provided investments include some Certificates of Deposits, I-Owe-You instruments such as bonds, fixed deposits, recurring accounts and prolonged cash back plans. Such investment options provide an assured return and it is a great way to utilize the cash which is lying around.
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