Short term smart investment options

To start with,if goals are short-term,conservative approach is best suited as aggressive investing always needs ample time to show returns and aggressive short term investing puts capital at risk.

Fixed Deposits: Interest rates today,are near their all-time high levels. Private sector lenders including Lakshmi Vilas Bank (LVB) and Dhanlaxmi Bank are amongst the most generous ones. While 1-2 years deposits with LVB will fetch you 10.5 per cent,a 300-day deposit with Dhanlaxmi Bank will earn you an attractive 10 per cent. Also,deposits ranging 6-12 months are offering anywhere between 8-9 per cent.

Recurring deposits: RDs make sense if one does not have lump sum funds,but have enough monthly inflows to invest periodically. The interest rates on RDs are higher than savings accounts and almost similar to those on FDs and typically they are available for 6-24 months tenure. RDs are particularly useful for accumulating funds for special goals e.g. if you plan a vacation worth R 60,000 after 6 months,you can do so by creating a 6 month RD putting R 10,000 every month rather than taking a R 60,000 hit at one go.

Liquid/ Ultra Short Term Funds: A specialised form of mutual funds that invest in fixed income instruments including treasury bills,commercial paper (CPs),certificates of deposits (CDs),securitised debt etc.,for extremely short-term ranging from 90-365 days. These funds provide capital protection besides liquidity and returns are better than savings bank accounts (4 per cent).

Investments in these funds makes sense as the funds generally have inverse relation with interest rates,i.e. if interest rate appreciates,the value of the fund falls and vice-versa. So given the predicted downward interest rates trends,the yield on these funds should get higher. For example,since March 2010,yield on a 3-month CP has moved up from 4 per cent to about 10 per cent currently. In September,the gross annual yield on CDs and CPs has attractively hovered around 9.1-9.4 per cent respectively. Principal Near-Term Fund-Conservative,Templeton India Ultra Short Bond Fund,HDFC Cash Mgmt Fund-Treasury Advantage and IDFC Ultra Short Term Fund etc. are some of the prominent liquid/ultra short term fund in the market.

Options for investors with risk appetite

FMPs & MIPs: Fixed maturity plans (FMPs),and monthly income plans (MIPs) are debt focused instruments that primarily invest in bonds and fixed deposits of similar maturity periods,but has small equity exposure of up to 15 per cent (25 per cent for MIPs). The difference in both instruments lies in the type: FMPs have a fixed maturity period while MIPs can be bought/ sold at any time.

Further,both involve credit risk and hence returns are not guaranteed. Further,they are more liquid and tax-efficient than fixed deposits. An investor can exit any time during the term as FMPs are listed on stock exchanges,through paying exit loads ranging 0.5-1 per cent.

FMPs and MIPs are a good choice for those looking for capital protection first and then allowing room to maximise returns through equity exposure. Ensure that you invest in high rated FMPs/MIPs as the difference in yields between the two instruments arises out of risk taken on in the portfolio. An FMP/ MIP having top rated instruments in its portfolio would deliver lesser returns than FMP/MIP based on lower rated papers. Higher returns means that the fund manager has been taking on more credit risk in the portfolio.

Investments in both FMP/ MIPs make sense till the interest rates remain high,because historically,bond yields tend to move in tandem with the interest rates. Once interest rates start declining,investments in bonds will become less lucrative. Since FMPs and MIPs predominantly invest in debt,they are the beneficiary by default. However,their exposure in equity may pose a bit of risk as the markets at present,are completely volatile due to weak global cues.

Options for aggressive investors

At the outset,it is not a prudent strategy to be aggressive for short term as risk of investment erosion is high. However,still there are avenues wherein investors today can benefit using their expertise or knowledge even in the short term.

Commodities: Investing in commodities may prove lucrative given the weak fundamentals in the US and the euro zone countries and weakening of dollar as a global currency. Gold prices are expected to rise further amidst few corrective fluctuations. Likewise,oil prices globally,are likely to remain firm due to tight oil supplies and rising demand,beside the weak global fundamentals into 2012.

One can invest in gold by buying physical gold bars,jewellery,e-gold,and ETFs. Of late,gold ETFs have emerged as a convenient means of investing in gold as there is no physical delivery,or security issues.

Investment in commodities can be made through the stock exchanges futures segment. Do remember that investing in commodities requires a forecasting ability to take a view about a trend over a length of time.

Corporate FDs: One can also look at corporate FDs with 1-2 year time horizon. These

deposits can earn you as much as 9-13 per cent per annum. However,they are unsecured and carry credit risk. Also in the present scenario,where corporate growth has been hampered by high interest rates and consequent liquidity crunch,corporates are more prone to default on their payments. An investor should look at the ultimate purpose of funding,promoter’s credibility,past debt servicing record,sector dynamics etc.

Higher returns are reward for taking more risk. The varied investment options for the short term have their pros and cons in terms of risk-appetite,liquidity,maturity period etc. So invest as per your risk appetite. Understand the risk involved in going ahead with the decision and see if it matches your risk appetite.

—Author is Business Head,Rupeetalk.com