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Short-term investments, also known as marketable securities or temporary investments, are financial investments that can easily be converted to cash, typically within five years. Many short-term investments are sold or converted to cash after a period of only 3–12 months.
Let’s look at how they work, their perks and drawbacks, and how they differ from long-term investments with examples.
What are short-term investments?
The term “short-term investments” can also refer specifically to corporate-owned financial assets of a similar kind but with a few additional requirements. Recorded in a separate account and listed in the current assets section of the corporate balance sheet, short-term investments in this context are investments that a company has made that are expected to be converted into cash within one year.
Short-term investments can be contrasted with long-term investments.
How do short-term investments work?
The goal of a short-term investment—for both companies and individual or institutional investors—is to protect capital while also generating a return similar to a treasury bill index fund or another similar benchmark.
Companies in a strong cash position will have a short-term investment account on their balance sheet. As a result, the company can afford to invest excess cash in stocks, bonds, or cash equivalents to earn higher interest than what would be earned from a normal savings account.
Short-term investments vs. long-term investments
Unlike long-term investments, which are designed to be bought and held for a period of at least a year, short-term investments are bought knowing they will be quickly sold.
Typically, long-term investors are willing to accept a higher level of volatility or risk, with the idea that these “bumps” will eventually smooth out over a long period—as long as, of course, the investment is growing on a positive trajectory.
Advantages and disadvantages of short-term investments
Short-term investments help ground an investor’s portfolio. Although they typically offer lower rates of return compared to investing in an index fund over time, they are highly liquid investments that give investors the flexibility to make money they can withdraw quickly if needed.
For a business, long-term investments are not counted as income until they are sold. This means that companies that decide to hold or invest in short-term investments count any fluctuations in price at the market rate. This means short-term investments that decline in value are marked down as a loss for the company on the income statement.
Examples of short-term investments
Some common short-term investments and strategies used by corporations and individual investors include:
Certificates of deposit (CDs): These deposits are offered by banks and typically pay a higher interest rate because they lock up cash for a given period. These periods usually range from several months up to five years. They are Federal Deposit Insurance Corporation (FDIC)-insured for up to $250,000.
Money market accounts: Returns on these FDIC-insured accounts will beat those on savings accounts but require a minimum investment. Keep in mind that money market accounts differ from money market mutual funds, which are not FDIC-insured.
Treasuries: There are a variety of these government-issued bonds, such as notes, bills, floating-rate notes, and Treasury Inflation-Protected Securities (TIPS).
Bond funds: Offered by professional asset managers/investment companies, these funds are better for a shorter time frame and can offer better-than-average returns for the risk. Just be aware of the fees.
Municipal bonds: These bonds, issued by local, state, or non-federal government agencies, can offer higher yields and tax advantages since they are often exempt from income taxes.
Peer-to-peer (P2P) lending: Excess cash can be put into play via one of these lending platforms that match borrowers to lenders.
Roth IRAs: For individuals, these vehicles can offer flexibility and a variety of investment options.
Real-world example of short-term investments
In its quarterly financial statement released on July 23, 2022, Infosys Limited, one of India’s leading IT companies, disclosed having ₹35,600 crores of short-term investments on its balance sheet.
The largest portion comprised Indian government securities amounting to ₹24,000 crores. This was followed by high-grade corporate bonds valued at ₹8,000 crore and fixed deposits with banks totaling ₹3,000 crore.
Additionally, the company held ₹600 crores in asset-backed securities, with the remaining comprising commercial papers and Treasury bills.
In summary, short-term investments offer liquidity, flexibility, and modest returns to both companies and individual investors. Though they pay less than long-term plays, short-term vehicles like CDs, money markets, bonds, and Roth IRAs provide stability while still generating income.
According to the Reserve Bank of India, only scheduled commercial banks (including foreign banks) and All India Financial Institutions (AIFIs) can issue certificates of deposit (CDs) in India. Regional rural banks, cooperative banks, and local area banks are not eligible to issue CDs.
RD and SIP are different investment options with different risk and return profiles. RD offers fixed and guaranteed returns, but SIP offers variable and potentially higher returns. The choice between RD and SIP depends on your investment horizon, risk appetite, and financial goals.
The answer depends on your savings goals and liquidity needs. CDs usually offer higher interest rates than money market accounts, but they have penalties for early withdrawals. Money market accounts are more flexible and accessible, but they have lower and variable interest rates.
Bonds can be a good investment option in India for investors who seek steady income, low risk, and portfolio diversification. However, the returns from bonds depend on various factors, such as interest rates, inflation, liquidity, and credit ratings. Therefore, investors should do their research before investing in bonds.
Certificates of deposits are generally low-risk savings accounts that offer higher interest rates than traditional savings accounts. However, they have some drawbacks, such as penalties for early withdrawals, lower liquidity, and inflation risk. CDs are best suited for savers who have a fixed time horizon and a low-risk appetite.