What are the best short-term, low-risk investments?

This question was submitted on the blog’s Q&A page recently:

Hi Lavanya, 24 year old working professional – making close to 65,000 INR per month in hand on an average (post deductions). I am planning to do my Masters’ next year in India – June/July 2022. The course fee in total would cost somewhere around 20-25 lakh INR. I have saved close to 10L INR now. I wanted to know if there are any viable investment options that I can consider in this short tenure. Points I’d like to add: 1. I would need my cash liquid in less than one year – for enrolling by July, I might have to use up my savings by April/May 2022. This means I barely have 8-9 months in hand. 2. My risk appetite is quite low for now, because the money I lose now = I loan that money from bank, which I don’t think is a viable option for me. Is it in fact wise to invest with these conditions? Or a short term Fixed Deposit the only better option for me? Please let me know. Thanks in advance!

Thank you for the question & good luck with your master’s journey! This is quite relevant for anyone who’s looking to do their higher studies abroad. So there are three primary aspects to this question:

1. Short Term – The money is required within 8 months
2. Liquidity – Liquidity is the ability to generate cash at short notice, with ease and at a fair value for one’s investment. In this case, the money needs to be available as cash by April/May 2022
3. Low Risk – If one needs the money at hand quickly, they can’t afford to take any massive risks which could result in money lost

What are the investments that even fall into these categories?

Please note that I am not a SEBI registered investment advisor. The purpose of the information below on the best short-term low-risk investments is not advisory, but only educational in nature.

Bank FDs

The good old bank FD is probably among the safest ways to “invest” money for the short term. While the low risk is an obvious pro, the returns might hover only around 5% per annum, which means that you’ll only make about 2.5% overall in interest. This interest is taxable, as well.

Overnight Funds

Overnight Funds are mutual funds that invest in very short-term debt instruments. They can be considered to be an alternative to your savings bank account. They’re low-risk, highly liquid, and often considered an alternative to one’s savings bank account. You can withdraw your money in a day. But they’re not optimized for returns. The interest that one can earn through overnight funds is even lower than an FD.

Liquid Funds

Like Overnight Funds, these funds invest in debt instruments that mature within 90 days or less. Liquid funds are low-risk funds. Their returns are also quite impressive, with many funds beating savings bank interest rates and offering returns that hover around FD rates. The advantage of liquid funds is their…liquidity. Withdrawing money from these funds is quick & convenient.

Ultra Short Duration Funds

This is another type of mutual fund that is focused on debt instruments. Ultra-short-duration funds invest in debt that will be cleared over 3-6 months. They’re not as liquid as overnight funds but are still low on risk. The return one can earn on these funds is similar to bank FDs or can even be higher, depending on the fund invested.

Money Market Funds

Money market funds are also a kind of mutual fund. Retail investors (people like you and me) can’t trade in the money market. So, these funds offer an opportunity to invest in them. Typically, money market instruments represent debt that will mature within a year. So, while they are not as liquid as the Ultra Short Duration or Overnight Funds, they offer potentially higher returns than both. But carry a slightly higher risk as well.

So which is the best short term low risk investment?

The best short-term low-risk investment depends entirely on the investor’s risk appetite and what they want to achieve with their money. The idea behind this post was to shed light on all the options available! Whether you’re looking to park your emergency fund or saving for an event in the near future, it is always good to know the short-term, low-risk investments that are out there so you can make the most appropriate choice.