Why Should You Prefer Short-Term Investments?

Why Should You Prefer Short-Term Investments?

By Yash

There are various short-term investment choices present in the market that can be converted into cash easily. The period for such short-term investments goes up to six years. The investments should be of high quality and should also contain good liquidity. The investment is best suited for people who need predictable returns and do not have much understanding of risk. You will find out a lot about short-term investments in this article.


Short-Term Investment Definition


Short-term investment choices are financial instruments that can be rapidly liquidated into cash within a short period. These investments are usually temporary and are used for keeping the excess funds of the investor for a short period. The short-term investments are very liquid and are utilized by the investors to meet their future expenses. These investments are not too risky compared to the long-term investment choices. This is because the products of investments do not have long tenure and thus give results that can be forecasted more easily. One of the choices available for short-term investments is government securities, debt funds, recurring deposits, and high-yielding savings accounts. These are the top popular short-term investments that have a tenure of a couple of years as a maximum.

There are also other such investments that have a tenure of fewer than six years. These are large-cap mutual funds, national savings certificates, post office time deposits, and bank fixed deposits. These investments also mean that the financial assets are listed under the head of current assets on the firm's balance sheet. These current assets are seen as short-term investments because they can be liquidated into cash within a year.


The Function of the Best Short-Term Investments


Short-term investments are such instruments that can be rapidly converted into cash. The main aim of such investments for both firms and individual investors is to safeguard capital and give some returns simultaneously. These investments give higher returns than the usual bank savings account. Thus, the investors can park the funds lying in excess with them in these avenues and get a greater profit. Investors with an investment horizon of a shorter term of fewer than six years can invest their funds in these instruments. For firms, short-term investments assist in getting more income to meet their needs regarding working capital. Firms which has a positive cash balance can also attempt to put some money into such investments. Typically, the firms put their excess funds for a period ranging up to a year. Each investment they make is very liquid and can be converted into cash rapidly. Since such investments give results that can be estimated, they are seen as low-risk and high-quality instruments.

Also, the investors can use their excess funds to meet their aims for the short term. These aims can be funding a vacation, or purchasing a car, which can be realized by these short-term investments. Instead of keeping idle cash lying around for any time, an investor can park their money in such an investment and get greater returns than bank accounts.


Long-Term Investments vs. Short-Term Investments


The long-term investments are created to be purchased and held for a long period. The period to hold it is at least twelve months. But short-term investments are purchased with the aim that they will be sold off rapidly. Usually, the investors who are in for the long term are happy to accept a greater level of risk or volatility. The idea is that the fluctuations will finally level out over a period. But the investment should grow in a positive manner overall. The investments made for the long-term are also utilized by people who can keep their cash away and do not have the requirements for it at that point to do things such as buy a home or a vehicle.


Advantages of Short-Term Investments


Such investments help to protect the portfolio of an investor. They usually give fewer returns when compared to keeping their money in a bank account over a period. They have good liquidity and give investors the chance to make money that can be withdrawn rapidly. For any firm, long-term investments are not seen as income until they are sold in the future. This means that the firms that decide to invest or hold short-term investments keep track of the volatility in the price in the market rate. This means that these investments that decrease value are seen as a loss for the firm in the annual income statement.




Short-term investments are good avenues for retail investors and firms seeking stable and liquid choices to increase their wealth. The best short-term investments help to do that. The investor must do the work and choose the best short-term investments for their needs.