Best Short Term Investment Plans in India to Park Money

This post was most recently updated on February 20th, 2024

I have seen a lot of people asking me the same question on Reddit and Quora about Best Short Term Investment Plans in India to Park Money because they have a surplus sitting in their bank account that is not utilized properly.

In India, you are spoiled with choices, but unfortunately, many people just let their money sit idle and not earn good returns. The impact of this could be huge, as you could lose your chance to generate passive income for yourself.

Having said that, investing in stocks shouldn’t be the only way to generate more money. You should look for investment options that will give you better returns than savings accounts with the least risk.

In this blog post, I will share with you some of the options to park your money for short-term investments. Please note that this is not financial advice, and you should do your own research before investing.

Consider reading: 13 Safe Investment Options in India

Best Short Term Investment Plans in India

Lets dive deeper and look at each of the options.

Before we go deeper use our In-Hand Salary Calculator to check how much in-hand salary you will receive.

Liquid Funds

Liquid funds are debt mutual funds that invest in securities with a maturity of up to 91 days. These funds offer high liquidity, low risk, and stable returns. They are suitable for investors who want to park their surplus funds for a few days or weeks.

Liquid funds are one of the Best Short Term Investment Plans if you are not sure what to do with your money and just want to park it somewhere to get a decent return.

Pros and Cons of Liquid Funds

• Pros:
  • Liquid funds offer higher returns than savings accounts and fixed deposits.
  • Liquid funds have no exit load or penalty for early withdrawals.
  • Even if you keep investing in liquid funds for less duration, You will get much better returns than FD, as FD has preclosure charges.
• Cons:
  • Liquid funds are not risk-free and may be affected by interest rate fluctuations and the credit risk of the underlying securities.
  • Liquid funds may have expense ratios and transaction costs that reduce the net returns.
  • Liquid funds are not covered by deposit insurance, unlike bank deposits.

Expected Returns per Year

The average return of liquid funds in the last one year was 6.9%. However, the actual return may vary depending on the fund’s performance, portfolio composition and market conditions.

Tax Liability

From April 1, 2023, earnings from liquid funds will be added to the income for tax calculation.

Want to calculate your tax? Consider using the Old Tax Regime vs New Tax Regime tax Calculator

Why Should You Invest or Not Invest in Liquid Funds?

You should invest in liquid funds if you want to earn higher returns than savings accounts and fixed deposits without compromising on liquidity and safety. You should not invest in liquid funds if you are looking for guaranteed returns or protection from market volatility.

Consider reading: Liquid Fund Vs FD Investment

Short Term Debt Funds as Investment Options

Short term debt funds are debt mutual funds that invest in securities with a maturity of one to three years. These funds offer moderate risk and return profile. They are suitable for investors who have a short-term investment horizon of one to three years.

Liquid funds are one of the Best Short Term Investment Plans if you are not sure what to do with your money and just want to park it somewhere to get better returns than Fixed deposits.

Pros and Cons of Short Term Debt Funds

• Pros:
  • Short term debt funds offer better returns than liquid funds and fixed deposits for longer tenures.
  • Short term debt funds have lower interest rate risk and credit risk than long term debt funds.
  • Even if you keep investment your investment in short term fund for lesses duration. You will get much better returns than FD, as FD has preclosure charges.
• Cons:
  • Short term debt funds are not risk-free and may be affected by interest rate fluctuations and credit risk of the underlying securities.
  • Short term debt funds may have exit load or penalty for early withdrawal depending on the fund’s scheme.
  • Short term debt funds are not covered by deposit insurance unlike bank deposits.

Expected Returns per Year

The average return of short-term debt funds in the last year was 7.5%. However, the actual return may vary depending on the fund’s performance, portfolio composition, and market conditions.

Tax Liability

From April 1, 2023, earnings from the short-term debt funds will be added to the income for tax calculation.

Why Should You Invest or Not Invest in Short-Term Debt Funds?

You should invest in short term debt funds if you want to earn better returns than liquid funds and fixed deposits for longer tenures without taking too much risk. You should not invest in short term debt funds if you need liquidity or certainty of returns in the short term.

Thinking of going big investment? Use our Investment Goal Calculator to plan your investments.

Fixed Deposit as Investment Options

Fixed deposit (FD) is a bank deposit that offers a fixed interest rate for a fixed tenure. FDs offer safety, stability and guaranteed returns. They are suitable for investors who want to preserve their capital and earn a regular income.

Fixed Deposits are the most popular Short Term plans in India because they are easy to manage with the same bank account.

Pros and Cons of Fixed Deposit

• Pros:
  • Fixed deposit offers assured returns irrespective of market conditions.
  • Fixed deposit is covered by deposit insurance up to Rs 5 lakh per depositor per bank.
  • Fixed deposit allows premature withdrawal with a penalty or partial withdrawal with a reduced interest rate.
• Cons:
  • Fixed deposit offers lower returns than debt mutual funds and equity mutual funds in the long run.
  • Fixed deposit is taxed as income from other sources, which means there is no indexation benefit or concessional tax rate.
  • Fixed deposit has low liquidity and flexibility as compared to mutual funds.

Expected Returns per Year

The average interest rate on fixed deposits for a one-year tenure was 6.5%. However, the actual interest rate may vary depending on the bank, amount, and tenure of the deposit.

Tax Liability

Fixed deposit is taxed as income from other sources. The interest income is added to the investor’s income and taxed as per the applicable slab rate. There is no tax deducted at source (TDS) if the interest income is less than Rs 40,000 per year for non-senior citizens and Rs 50,000 per year for senior citizens.

Why Should You Invest or Not Invest in Fixed Deposit?

You should invest in fixed deposits if you want to earn assured returns with safety and stability. You should not invest in fixed deposits if you want to earn higher returns with liquidity and tax efficiency.

Recurring Deposit as Investment Options

A recurring deposit (RD) is a bank deposit that allows the investor to deposit a fixed amount every month for a fixed tenure and earn a fixed interest rate. RDs offer discipline, convenience, and compounding benefits. They are suitable for investors who want to save regularly and achieve their short-term goals.

Recurring Deposits are a good short term investment options if you want to increase your savings on a monthly basis.

Pros and Cons of Recurring Deposit

• Pros:
  • Recurring deposit offers compounding benefits as the interest is calculated on the monthly balance.
  • Recurring deposit is covered by deposit insurance up to Rs 5 lakh per depositor per bank.
  • Recurring deposit allows premature withdrawal with a penalty or partial withdrawal with reduced interest rate.
• Cons:
  • Recurring deposit offers lower returns than debt mutual funds and equity mutual funds in the long run.
  • Recurring deposit is taxed as income from other sources, which means there is no indexation benefit or concessional tax rate.
  • Recurring deposit has low liquidity and flexibility as compared to mutual funds.

Expected Returns per Year

The average interest rate of recurring deposits for one year tenure was 5.5%. However, the actual interest rate may vary depending on the bank, amount and tenure of the deposit.

Tax Liability

Recurring deposit is taxed as income from other sources. The interest income is added to the investor’s income and taxed as per the applicable slab rate. There is no tax deducted at source (TDS) if the interest income is less than Rs 40,000 per year for non-senior citizens and Rs 50,000 per year for senior citizens.

Why Should You Invest or Not Invest in Recurring Deposit?

You should invest in recurring deposit if you want to save regularly and achieve your short-term goals with compounding benefits. You should not invest in recurring deposit if you want to earn higher returns with liquidity and tax efficiency.

Sweep-in Account as Investment Options

Sweep-in account is a bank account that links your savings account to your fixed deposit account. It automatically transfers the excess amount from your savings account to your fixed deposit account and earns a higher interest rate. It also automatically transfers the required amount from your fixed deposit account to your savings account when you need it. It offers liquidity, flexibility and optimization.

Pros and Cons of Sweep-in Account

• Pros:
  • Sweep-in account offers higher returns than savings account by utilizing the idle money in fixed deposits.
  • Sweep-in account offers liquidity and flexibility by allowing you to withdraw money from fixed deposits without breaking them.
  • Sweep-in accounts offer optimization by allowing you to choose the threshold amount, sweep-out amount and sweep-in amount as per your preference.
• Cons:
  • Sweep-in account offers lower returns than debt mutual funds and equity mutual funds in the long run.
  • Sweep-in account is taxed as income from other sources for the interest earned from fixed deposits, which means there is no indexation benefit or concessional tax rate.
  • Sweep-in accounts may have minimum balance requirement, transaction charges or penalty for early withdrawal depending on the bank’s scheme.

Expected Returns per Year

The average interest rate of sweep-in accounts for one year tenure was 5.5%. However, the actual interest rate may vary depending on the bank, amount and tenure of the deposit.

Tax Liability

Sweep-in account is taxed as income from other sources for the interest earned from fixed deposits. The interest income is added to the investor’s income and taxed as per the applicable slab rate. There is no tax deducted at source (TDS) if the interest income is less than Rs 40,000 per year for non-senior citizens and Rs 50,000 per year for senior citizens.

Why Should You Invest or Not Invest in Sweep-in Account?

You should invest in sweep-in account if you want to earn higher returns than savings account by utilising the idle money in fixed deposits without compromising on liquidity and flexibility. You should not invest in sweep-in account if you want to earn higher returns with tax efficiency and optimization.

Arbitrage Funds as Investment Options

Arbitrage funds are hybrid mutual funds that exploit the price difference between two markets for the same asset. They buy an asset in one market sell it in another market simultaneously, and earn risk-free profits. They are suitable for investors who want to earn tax-efficient returns with low volatility.

Arbitrage funds are the Best Short Term Investment Plans if you are in a high tax bracket. The tax advantage you get from an Arbitrage fund beats any other short-term investment options.

Pros and Cons of Arbitrage Funds

• Pros:
  • Arbitrage funds offer higher returns than liquid funds and fixed deposits in a low-interest rate scenario.
  • Arbitrage funds are taxed as equity funds, which means they have a concessional tax rate of 15% for STCG and 10% for LTCG (if the gain exceeds Rs 1 lakh).
  • Arbitrage funds have low volatility and low correlation with market movements.
• Cons:
  • Arbitrage funds are not risk-free and may be affected by liquidity risk, execution risk and operational risk of the arbitrage strategy.
  • Arbitrage funds may have expense ratio and transaction costs that reduce the net returns.
  • Arbitrage funds may not perform well in a high-interest rate scenario or a low-volatility scenario.

Expected Returns per Year from Arbitrage Funds

The average return of arbitrage funds in the last year was 7.5%. However, the actual return may vary depending on the fund’s performance, portfolio composition, and market conditions.

Tax Liability of Arbitrage Funds

Arbitrage funds are taxed as equity funds. The short-term capital gains (STCG) are taxed at 15%. The long-term capital gains (LTCG) are taxed at 10% if the gain exceeds Rs 1 lakh.

Why Should You Invest or Not Invest in Arbitrage Funds?

You should invest in arbitrage funds if you want to earn tax-efficient returns with low volatility in a low-interest rate scenario. You should not invest in arbitrage funds if you are looking for high returns or consistent returns in a high-interest rate scenario or a low-volatility scenario.

Consider reading: Best Arbitrage Funds in India and Taxation

Other Best Short-Term Investment Plans

Apart from the above-mentioned options, there are some other investment options that you can consider for short-term investments. Some of them are:

• Ultra Short Duration Funds: These are debt mutual funds that invest in securities with a maturity of three to six months. They offer higher returns than liquid funds and lower risk than short-term debt funds. They are suitable for investors who have a short-term investment horizon of three to six months.
• Savings Plus Account: These are bank accounts that offer higher interest rates than savings accounts by linking it to a money market mutual fund. They offer liquidity, flexibility, and optimization. They are suitable for investors who want to earn higher returns than savings accounts without compromising on liquidity and flexibility.
• Equity Savings Funds: These are hybrid mutual funds that invest in a mix of equity, debt, and arbitrage opportunities. They offer higher returns than debt mutual funds and lower risk than equity mutual funds. They are suitable for investors who want to earn tax-efficient returns with moderate risk.

How to Select the Best Short Term Investment Plans from the Above Options

So. we have looked at all the Best Short Term Investment Plans available in India, but how do you select the one you want to invest in?

Choosing the best short-term investment plan depends on your investment objective, risk appetite, time horizon, and tax bracket. Here are some factors that you should consider before investing in any of the above options:

Why are you investing?

• For quick emergencies: Think about keeping your money in options like liquid funds or sweep-in accounts. They’re easy to take out and pretty safe.
• For fun events like holidays or weddings: You might like recurring deposits or short-term debt funds. They grow your money bit by bit and have a medium risk.
• To save on taxes or grow your wealth: Look into arbitrage funds or equity savings funds. They can give good returns and don’t move up and down too much.

How much risk can you handle?

• Like it safe? Go for fixed deposits or recurring deposits. They promise returns and are safe.
• Okay with a little risk? Liquid funds or short-term debt funds can be good. They give better returns than fixed deposits and are not very risky.
• Like taking risks for better returns? Arbitrage funds or equity savings funds might be your thing. They offer more returns and are less shaky than debt funds.

How long can you wait?

• Need money in a few days or weeks? Liquid funds are great because you don’t lose anything if you take your money out early.
• Can wait for 1-3 years? Try short-term debt funds or arbitrage funds. They offer some tax benefits and can give you more money if you keep them longer.
• Okay waiting for more than 3 years? Equity savings funds can be good. They give good returns and can save you tax in the long term.

How much tax do you pay?

• Paying 10% or 20% tax? Fixed deposits or recurring deposits might be better. They don’t tax you as much as some other options.
• In the 30% tax group? Look into arbitrage funds, as they have the least tax on maturity in short-term investment options.

Based on these factors, you can compare the pros and cons of each investment option and choose the one that suits your needs and preferences. You can also diversify your portfolio by investing in more than one option to balance your risk and return.

I write regularly on Reddit about investments. I have put together a quick guide to investing for newbies. This should help you build knowledge about investments

Closing Thoughts on Best Short Term Investment Plans in India to Park Money

I hope this piece made it easier for you to get the hang of where to put your money for short-term gains. We discussed the good and bad sides, the kinds of returns you can expect, the tax part, and which one’s the Best Short Term Investment Plan in India, depending on what you’re looking for.

Just remember, there’s no one perfect answer for everyone. It’s all about what suits you. If you want, you can even spread your money in different places to keep things balanced.

But always remember to do your homework before putting your money anywhere, and if you’re unsure, maybe chat with a financial expert. Thanks for sticking to the end! If you’ve got thoughts or questions, just drop a comment below. Cheers!

FAQs on Best Short Term Investment Plans

Which investment is best for short term?

The best short term investment plans in India should offer high returns and safety. Options like fixed deposits, liquid funds, arbitrage funds and recurring deposits can be considered. It is important to assess your financial goals, risk tolerance, and liquidity needs before choosing the best investment option for your short-term goals.

What are 4 short term investments?

Some examples of short-term investments include savings accounts, fixed deposits, liquid mutual funds, and post office deposits. These investment options provide the flexibility to invest and withdraw quickly within a short time frame

Can you invest for 6 months?

Yes, you can invest for 6 months. Some of the Best Short Term Investment Plans for 6 months include Liquid Mutual Funds and Arbitrage Funds.

What is the best way to park money for short term?

One of the best ways to park money for short term is to invest in liquid mutual funds which gives you good returns over short term with relatively less risk.