2020 came with a huge blow to the financial situation of nations as well as individuals. With just three months left in the year 2021, a lot of people are still trying to make back the funds lost in the previous year. Unfortunately, most of the popular investment plans take quite a while before a good profit can be made.
Short-term investments, also known as marketable securities or temporary investments, are financial investments that can be easily converted into cash quickly, usually within five years. Many short-term investments are sold or converted to cash within 3-12 months. CDs, money market accounts, high-yield savings accounts, government bonds, and Treasury bills are all examples of short-term investments. These investments are typically high-quality, liquid assets or investment vehicles.
Before we go on to define what a short term investment is, take a quick look at the table of contents below.
Table of contents
- What Is Short Term Investment?
- Is Short-Term Investing Profitable?
- Different Types of Short-Term Investments
- The Best Short-Term Investment
- Are Short-Term Investments Current Assets?
- How to Pick Short-Term Investments That Fit Your Needs
- 10 Best Short-Term Investments in 2023
- Frequently Asked Questions (FAQs)
- Conclusion
- References
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What Is Short Term Investment?
A short-term investment is a debt or equity security that is expected in a 3-12 month term to be sold or transformed into cash or is also termed a temporary investment or marketable security. This means that the management is a stock or bond which will earn a quick profit and plans to sell in the current accounting period. This in essence means that short-term investments must be readily convertible into cash. So if it can’t be sold readily then it isn’t considered a short-term investment.
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Is Short-Term Investing Profitable?
The profitability of a short-term investment depends on the purpose of your investment. If you’re investing to build your portfolio, then a short-term investment is probably not the ideal choice. However, if you need the money in a short time frame or you want a regular source of income- then a short-term investment is a way to go and is quite profitable.
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Different Types of Short-Term Investments
The different types o short term investments are;
- Treasuries- These government-issued bonds come in various forms, including notes, bills, floating-rate notes, and Treasury Inflation-Protected Securities (TIPS).
- Peer-2-Peer Lending- Excess funds can be invested in one of these lending platforms that connect borrowers and lenders.
- Certificates of Deposit (CDs)- Banks offer these deposits, which typically pay a higher interest rate because they lock up cash for a set period of time. They are FDIC-insured up to a maximum of $250,000.
- Government Bonds- A type of debt-based investment in which you lend money to the government in exchange for a fixed interest rate. Governments use them to raise funds for new projects or infrastructure, and investors use them to receive a fixed return paid at regular intervals.
These are just a few types of Short-term investments that have been in play for years which people have been gaining from. Always remember to consult a seasoned Investor to ensure you know all the details about the investment plans.
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The Best Short-Term Investment
If you are looking for returns in a year or less, the best short-term investment is Money Market Accounts (MMA). A money market account is a bank or credit union account that pays interest. Money market accounts (MMA), also known as money market deposit accounts, have some features not found in other types of accounts. Most money market accounts offer higher interest rates than traditional passbook savings accounts, frequently including check-writing and debit card privileges.
MMAs provide numerous benefits, such as higher interest rates, insurance protection, and check-writing and debit card privileges. One of the main draws is the possibility of earning higher interest rates than in savings accounts. Because they are permitted to invest in certificates of deposit (CDs), government securities, and commercial paper, they can offer higher interest rates. MMAs also provide easy access to funds and the ability to transfer funds between multiple accounts at the same institution. Furthermore, many money market accounts include check-writing privileges and a debit card, similar to a regular checking account.
Are Short-Term Investments Current Assets?
In order to adequately answer this prompt, we have to first understand what a current asset is. A current asset is referred to as an asset that can be converted into cash within a period of one year. So YES! For accounting purposes, short-term investments can be considered current assets. Short-term investments and marketable securities are investments in securities that will generate a cash return within a year. These securities can be purchased and sold on the public stock and bond markets.
How to Pick Short-Term Investments That Fit Your Needs
Quite frankly, like any other investment, there are certain factors that need to be considered before deciding on an investment plan. It truly depends on what you’re looking to get out of the plan and the period of time that you’re willing to invest. There are four main parameters to ponder on before deciding what short-term investment fits your needs and they are:
- Reason for investment
- Length of time of investment (1 year or longer)
- Age
- Risk factor
It is VERY pertinent to note that as is with any investment, risks must always be factored in. Fret not, however; we’re going to give you the best short-term investments in 2021 to ensure you make an informed decision before you start your investment journey. Let’s get started!
10 Best Short-Term Investments in 2023
#1 Short-Term Corporate Bond Work
Corporate bonds are debt securities sold to investors by corporations to raise funds. Instead of taking out high-interest bank loans, corporations issue bonds to investors at much lower interest rates. Interest, like dividends on stocks, is typically paid to investors quarterly or twice a year. Corporate bonds are frequently classified as either investment grade or non-investment grade (also known as high-yield or junk bonds).
#2 Arbitrage Funds
An arbitrage fund is a mutual fund that takes advantage of price differences between assets that should be priced the same. Arbitrage funds are excellent short-term investments because they are low-risk while providing high returns.
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#3 High-Yield Savings Account
A high-yield savings account is the most secure short-term investment available. Your money is not only highly liquid and easily accessible but also FDIC-insured, which means it is safe in case of a bank failure. In terms of structure, high-yield savings accounts are no different from traditional savings accounts. You won’t have to jump through any complicated hoops to open a high-yield savings account. Simply look for a bank offering savings accounts with 1% or higher interest rates.
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#4 Short-Term U.S Government Bond Funds
Government bonds are similar to corporate bonds in that they are issued by the federal government of the United States and its agencies. Government bond funds purchase investments from federal agencies such as the Government National Mortgage Association, such as T-bills, T-bonds, T-notes, and mortgage-backed securities. These bonds are regarded as low-risk. Because government bonds are among the most widely traded assets on exchanges, government bond funds are extremely liquid. They are available for purchase and sale whenever the stock market is open.
#5 Cash Management Accounts
A cash management account, similar to an omnibus account, allows you to invest in a variety of short-term investments. You can frequently invest, write checks from the account, transfer money, and perform other typical banking functions. Robo-advisors and online stock brokers are common providers of cash management accounts. As a result, the cash management account provides you with a great deal of flexibility.
#6 Bank Account Promotions
It isn’t unheard of for banks to offer money if a prospective client opens an account with them. Of course, there are restrictions that must be met, but if you have extra income that you wish to invest in the short term without danger, this can provide excellent results.
#7 Municipal Bond Funds
Municipal bonds and US government bonds are comparable in that they are both issued by governments to raise funds. On the other hand, municipal bonds are issued by state and local governments rather than the federal government of the United States. They are used to pay day-to-day operations and projects such as school construction, roadway construction, and sewage construction. This short-term investment option is relatively safe and has tax advantages.
#8 Money Market Mutual Funds
A money market mutual fund is different from a money market account. While they are both solid short-term investments, they have different dangers despite their similar names. A money market mutual fund invests in short-term securities such as Treasury bills, municipal and corporate bonds, and bank debt. Because it’s a mutual fund, you’ll have to pay an expense ratio to the fund firm out of the assets managed.
#9 Certificate of Deposit (CD)
CDs allow you to invest money at a fixed interest rate for a certain period. CDs are time deposits, not savings accounts, where your money produces interest and is instantly available. This means you must finish the given term duration to receive interest on your money. You will be penalised if you withdraw your money before the term length finishes (the maturity date). It’s best to avoid the penalty because it can occasionally result in a month’s worth of interest. CD terms range from one, three, and six months to a year or more. Generally, the longer the CD’s term, the more money you will make. The shorter the duration, the less money you’ll make.
#10 Money Market Accounts
Money market accounts are a type of bank deposit that normally pays a higher interest rate than savings accounts while also requiring a larger minimum investment. Money market accounts are extremely liquid, yet withdrawals are restricted by federal law.
Frequently Asked Questions (FAQs)
When it comes to classifying what a good short-term investment consists of, there are three things to consider: stability, utility and low transaction costs.
There are numerous ways to invest money in the short-term asides from the best short-term investments listed above. The list includes but is not limited to: Recurring deposits, Debt instruments, Bank Fixed Deposits, and Post-office Time Deposits.
A term deposit is a fixed-term investment that entails depositing money into a financial institution’s account. Term deposits typically have maturities ranging from one month to a few years, with varying levels of required minimum deposits.
Short-term investments benefit those with an investment window of 1-3 years. Short-term investments are your niche if you are on the prowl for a stable income or even a first-time investor.
Individuals with limited financial resources have a plethora of options. They can invest the funds in any investment that does not have a minimum balance requirement, such as certain savings accounts, fractional shares of an index fund, or even cheaper stocks, bonds, and CDs.
Conclusion
To get started, ensure you have an experienced investor so that you can slowly learn the ropes and not rush into major decisions.
References
- investopedia.com – Short-Term Investments
- investopedia.com – Money Market Accounts
- bankrate.com – 8 best short-term investments in September 2023
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