If you are investing only for one year, then you have a short-term investment horizon. Hence, considering the volatile nature of the market, you should stay away from the equity options. For investments having a short-term horizon, capital protection is essential as there isn’t much time left to recover if there are any adverse developments in the market.
We have covered the following in this article:
Debt funds are ideal for short-term investment horizons. These funds are risk-averse and are open-ended. Debt mutual funds offer a high level of security as they invest in high-rated debt instruments such as treasury bills, government and corporate bonds.
Also, debt funds have the potential to offer much higher returns than a regular savings bank account. Under debt funds, you can choose to invest in low duration funds. These funds invest in securities that mature between six months and one year. Apart from that, you may also consider investing in money market funds. These funds invest in money market instruments that mature within a year.
Fixed maturity plans are close-ended mutual funds. These funds invest in fixed income instruments with corresponding maturities. The fund manager will pick instrument such that they mature at almost the same time. Fixed maturity plans come with a maturity period ranging between one month to five years.
As these funds hold securities until maturity, they are not influenced by the interest rate volatility. The main objective of fixed maturity plans is the offer steady returns over a period.
Arbitrage mutual funds invest in cash and derivative segments with arbitrage opportunities of the equity market and opportunities in the derivates segment. These funds are open-ended, and you may invest in these if you can stay invested for at least one year to take advantage of the tax rules.
The risk involved in arbitrage funds is quite low. However, the returns are not assured as the arbitrage opportunities are not always found. Hence, the returns of arbitrage funds depend on arbitrage opportunities available in the futures market and spot market.
They invest majorly in debt instruments that yield a predictable return and mature in 91 days. They maybe any of the money market instruments like t-bills, certificates of deposit, commercial papers, etc. These are highly liquid funds without any entry or exit load. These are not entirely risk free as the fund value might drop significantly if the underlying asset's credit rating is suddenly downgraded.
This is considered one of the most secured investment options. Post office term deposits (POTDs) come with tenures of 1,2,3 and 5 years. The sovereign guarantee backs the investments in POTDs. The government fixes the rate of returns every quarter. The entire investment made will earn returns at the prevailing rate. Any new investment made after the announcement of the new interest rate shall earn returns at that rate.
Fixed deposits (FDs) are one of the traditional investment options in India. If you have a lump sum at your disposal, then you can invest that in fixed deposit. FDs offer an attractive interest rate and is much higher than what a regular savings bank account provides. Also, the investments made in fixed deposits are considered to be highly secured as there is no chance of flight.
Recurring deposits (RDs) are suitable if you wish to invest a small fixed sum regularly with a bank. You will receive a lump sum with interest at the end of the tenure of the recurring deposit. RDs will help you instill financial discipline as you will cultivate the habit of setting aside a fixed sum regularly. This is beneficial in the long run.
Like FDs, RDs too offer much higher returns than a regular savings bank account. One year investment horizon is not really short, and you shouldn’t park your funds in a savings bank account. Instead, it would help if you considered investing in the options mentioned above to earn an attractive return on your investment.