Rekha was interested in buying a car within two years of starting her new job. She was interested in maximizing her returns from her investments. How should she invest such that she maximises her returns from the investment, while keeping her money safe?
As Rekha was planning to invest for a period of two years, she should opt for short-term investment options.
Most of these options are debt instruments. Equities are no-no as they are very volatile in the short term and Rekha can end up losing her money. Also not all debt instruments are created equal.
Certain debt instruments like gilts tend to be very volatile and so should be avoided by those looking for the safety of their capital.
Here are some suitable investment options for Rekha that will not only offer her high returns but will also safeguard her capital.
- Short-term FDs: Nothing beats FDs when it comes to security, liquidity and high-returns. Always choose bank deposits over company deposits, which do offer high returns but are very risky. Select quality banks, both nationalized as well as private banks. However avoid little-known cooperative banks, which are as risky as company deposits.
- Short-term floating rate funds: The major drawback of an FD is that your money is locked in at a particular interest rate. So if the interest rate increases after opening a deposit account, you won't be eligible to benefit from this rate hike. E.g. if your FD carries an interest rate of 4 per cent and if the new interest rate become 4.25 per cent, you will still earn 4 per cent on your deposit. If you try to liquidate this deposit, you will end up losing interest for premature withdrawal.
To overcome this drawback of the FD, you can opt for floating rate funds. The interest rate here varies in accordance with the change in their benchmark index rate. So when the benchmark interest rate increases, the returns from these funds increase and vice versa.
However these returns come at a price. They are riskier than a traditional FD. Moreover, not all these funds are available to small investors as they require very high investment.
- Safety precautions to be followed when investing: It is very tempting to be taken in by high returns offered by these investment avenues. This can lead to investors making reckless investment decisions, thereby losing their money. Hence it is essential for you to follow these tips when investing even in short-term investment options. Invest as per your risk appetite. Understand the risk involved in going ahead with the decision and see if it matches your risk appetite. Only if you are comfortable with the risk involved, should you go ahead with the investment.
- Are you more concerned about protecting your capital or do you want higher returns, never mind the risk to your capital? Answering these questions will help you choose the best investment option for your needs.
- Check the reputation of the institution offering the investment avenue.
- Diversify your money amongst different bank FDs or funds. This will help you in protecting your capital, if any of the institutions fail to repay your money.
For short-term investments, short-term FDs and floating rate funds are excellent options offering high returns. But as with any investment, you should be careful as making wrong choices can lead to financial loss for you. Use the tips given in this article to get the best deal from your short-term investments.
