In Unit Linked policies, the investment risk in the investment portfolio is borne by the policyholder.

Top 11 Short Term Investment Options for 2021

Five mistakes you must avoid while investing to save income tax

Investors are always looking for investment options to park money for a while, until they need it. Their go-to option is the regular savings bank account. But there are plenty more short-term options for investors.

What is short term investment?

Any investment option which is less than 5 years is considered as a short term investment. Short term goals are set to achieve unavoidable things that are going to occur in the near future. For e.g. your kid is currently 16 years of age and after 2 years he/she will need cash for graduation. Buying your kid a motorbike when he graduates or a luxury car for your family 3 years down the line, these are all short term goals that require short term investments. Few of them you can postpone and few of them you can’t. To achieve definite goals in the near future, you must not take any risk and be specific about your decisions.

Investors with short-term money have two primary objectives:

  • Safety of capital
  • Return on capital

The typical investment tenure for best short term investment plans is less than 12 months.

Here are some short term investment options for such investors:

Sr No.

Short Term Investment Options


Ideal For

Savings accounts

Better liquidity (4%-7% returns)

Liquid funds

People looking for secure investments (4%-7% returns)

Short term funds

At par with Liquid funds

Recurring deposits

People who want to invest on a monthly basis


People with long term goals

Arbitrage funds

If held for more than year 8% interest

Fixed maturity plans

Similar to FDs with a lock in period of 3 years



Buy Term Plan

Following are some short term investment options:

  • Savings accounts

    One of the easiest and safest way to access your money is by having a savings account. The main motive here is liquidity, not that much on earning though. Banks provide not more than 4% to 7% return from savings accounts.

  • Liquid Funds 

    These are kind of mutual funds that invest in short term government certificates and securities of deposits. You can enter and exit at any given time as these investments are secure. Try restricting throwing in your emergency funds in these, as the redemption takes around 2 days. One can expect around 4%-7% post tax return on liquid fund investment.

    Investors can consider liquid funds to park money for a period as little as one day to as much as 90 days or even higher. Liquid funds invest in money market investments like call money among others. It is rare for liquid funds to see a dip in their net asset values (NAV).

    Investors can opt for the dividend option or the growth option. Dividend is taxed at nearly 30%. Capital gains are added to income and taxed at marginal income tax rate(rate of taxation). From a taxation point of view investors in the lower tax brackets are better off opting for the growth option while investors in the highest tax bracket can choose either option.

  • Short term funds

    Short term funds invest in securities that mature in 1-3 years. These funds are a little risky as the maturity of securities are more than ultra-short term and liquid funds. Taxation is the same as any other debt funds.

    Banks offer deposits of varying time frames beginning with a minimum of 7 days. So an investor looking to park money for even a week can choose a fixed deposit with a matching tenure.

    The interest on the deposit is added to income and taxed at the marginal rate of taxation.

    While liquid funds are suitable for investment tenures of a few days, short-term mutual funds are ideal for tenures running into a few months. Like liquid funds, short-term debt funds are managed conservatively with the explicit aim of safeguarding capital and posting modest capital appreciation.

    From a tax perspective short-term mutual funds are at par with liquid funds.

  • Recurring deposits (RDs) 

    This a type of secured investment and is suitable to those who don’t want to invest in a lump sum and rather invest on a monthly basis. You can either use Postal RD or Bank RD, generally bank offers RD for a minimum tenure of 6 months to a maximum of 10 years. Also, the interest received on RD is taxable.

  • National Savings Certificate (NSC) 

    One can also invest in 5 years Postal NSC, if only you’re sure that the goal is at exactly 5 years from today. You can claim tax deduction under Section 80C of Income Tax Act, but the interest will be taxable.

  • Arbitrage funds 

    Also known as equity mutual funds, arbitrage funds are more tax efficient if held for more than a year. They give approximately 8% of interest post tax.

  • Fixed maturity plans (FMPs) 

    They have a lock-in period of minimum 3 years and act exactly like your bank FDs. They are more tax efficient though and you can expect better returns than FDs.

    So these were the options and they’re laid out in front of you, choose anyone according to their tax benefits and interest earned so that you don’t make any mistake while investing.

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