Every year, you receive reminders from tax professionals and employers that tax season has begun. It is time to gather information about all of the long-term and short-term investment plans in which you have invested your money. Before we look at the best short-term investment plans on the market, it is also necessary that we know what short-term investment plans are.
More often than not, financial planning is about long-term investing. However, several immediate demands must be handled. People invest for shorter periods because their objective is approaching or they do not want to risk locking their money in for a longer period. Short-term investments can last anywhere from seven days to less than a year, and there is no predetermined time limit. You can choose from a number of products if you want to invest in the short term.
These products can be divided into two groups: those that provide fixed income and those that provide market-linked returns. Fixed-income investments are available with terms ranging from 7 to 12 months. Market-linked products are debt mutual fund schemes with underlying assets that have an average tenure of fewer than 12 months. This article will provide you with a list of short-term investment options to save tax.
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Advantages of the short term investment
Assets that can be converted into cash or sold in a short period, usually 1-3 years, are known as short-term investments. Short-term investment plans are liquid investments in which investors can park their savings for a short period and earn returns on them. They can provide good returns over a short period as well as tax benefits. Short-term investments are commonly made with short-term bonds, Treasury bills, and other money market funds. Short-term trading, often known as day trading, involves a high level of speculation and, as a result, a high level of risk. Here are some advantages and shortcomings of short-term investment opportunities.
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Short-Term Investing Benefits
- Short-term investing gives the investor more flexibility because they don’t have to wait for the security to mature before receiving cash. Long-term investments, on the other hand, can be liquidated by selling them on the secondary market, but the investor will make less money. Investors might make a lot of money in a short period.
- Short-term investing is less dangerous because the amount of money invested per transaction is far lower.
Drawbacks of Short-Term Investing
- Due to the large transaction volume and related brokerage commission fees, short-term investing has a significant cost. Short-term investing yields lower returns due to taxes and inflation.
- Because investors must actively monitor price changes and locate purchase and/or sale areas, it necessitates a certain amount of competence and time.
Short term investment opportunities for tax exemption
Here are some of the best short-term investments that will not only help you earn significant profits but will also help you save money on taxes:
- Equity Linked Saving Scheme (ELSS)
ELSS are tax-advantaged mutual fund investment schemes with a diverse portfolio. They’re also known as tax-advantaged funds. The fact that ELSS invests primarily in equities makes them one of the most advantageous short-term investment plans. The ELSS has the shortest lock-in term of all the tax-saving investment schemes, at three years.
You obtain income tax benefits as well as capital appreciation with these short-term investing programs. The lack of an entry or exit load is what attracts investors to these short-term investment programs. Furthermore, capital gains generated by these short-term investment programs are tax-free.
- Rajiv Gandhi Equity Savings Scheme (RGESS)
RGESS originated to encourage small investors with little or no experience to invest in domestic capital markets. It is now one of India’s best-performing short-term investment plans. The income ceiling for this scheme was first set at Rs. 10 lakh in 2012-2013, however, it was raised to Rs. 12 lakh in 2013-14.
The tax benefits under Section 80CCG are features that set this scheme apart from other short-term investments. You can deduct 50% of the amount you invest in this scheme from your taxable income, up to a maximum of Rs. 50,000 per financial year, if you participate in certain tax-saving short-term investments.
- Debt-Based Mutual Funds
Debt-based mutual funds are short-term investment plans that allow you to invest in fixed-income assets like corporate bonds and government securities. One of the reasons why individuals prefer short-term investments is that they can earn fixed interest while also benefiting from capital appreciation.
Debt funds are also known as fixed-income securities or short-term investment plans since the issuers of these funds promise or pre-determine the interest rate. Debt fund returns typically fall within the range expected by the issuers, making them risk-averse investors’ safe short-term investments. Debt fund capital gains are taxable based on the holding term, therefore they don’t fit into tax-advantaged investment strategies.
- Unit Linked Investment Plan (ULIP)
ULIPs are one-of-a-kind short-term investment plans that combine life insurance with investing incentives. They also give you the option of balancing your investments between stock and loan components depending on market conditions. The tax advantages of these short-term investment schemes, however, are subject to certain limitations.
As a tax-advantaged investment plan, ULIPs provide benefits under Section 80C if you pay the premium for at least two years. If you stop paying the premiums on these short-term investment plans, you will lose your tax benefits.
- Tax Saver Fixed Deposits
Tax Saver Fixed Deposits are a tax-advantaged investment plan that offers tax benefits under Section 80C of the Internal Revenue Code. By participating in these short-term investment plans with a five-year lock-in period, you can obtain a maximum deduction of Rs. 1,50,000 as an investor.
You should be aware, however, that the interest you earn on these short-term investments is taxed. Short-term investment plans have the potential to provide better returns than savings accounts.
- Fixed Maturity Plans
FMPs are closed-ended debt funds with a fixed maturity period, as indicated by the name. They are a type of short-term investment, with terms ranging from 30 days to 5 years. They are not the same as fixed deposits when it comes to tax savings. When you participate in these short-term investment plans for a period longer than a year, you can take advantage of indexation to reduce your tax liability. FMPs serve as an asset allocation tool for investors as well as being one of the short-term investment plans.
Do you invest in real estate for the long or short term?
You have two options when it comes to real estate investing. You can acquire real estate as a long-term investment to rent it out, or as a short-term investment to fix it up and sell it for a higher profit.
A short-term real estate investment will often yield a faster and larger return, but it will also come with a higher level of risk. Consider the following factors when deciding whether to invest for the long or short term. For properties in locations with constant or minor predicted improvements in value, a short-term real estate investment plan is ideal. Furthermore, if you know professionals who are willing to work on and improve your real estate for a reasonable price if you can devote significant time to the development of the real estate, and if you can afford to pay significant capital gains at tax time, short-term real estate investing may be right for you.
If you can expect a decent long-term appreciation from your real estate if working with renters doesn’t bother you if you can’t afford a large-scale refurbishment of your real estate, and if a tax break would be beneficial, then investing in real estate for the long term is probably the better option.
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How Do I Choose the Most Appropriate Short-Term Investment Strategy?
Even if your time horizon is three years or less, it can guide the types of assets to consider as well as the appropriate levels of risk to take. For example, if you need the money in three months, a portfolio with easily accessible cash investments may be more appropriate, whereas someone who doesn’t need the money for three years may have the flexibility to consider a broader range of investment options.
Given such a short time frame, it is prudent to reduce the level of risk in an investment strategy or portfolio. A business or market cycle typically lasts more than three years1, leaving insufficient time to recover from a loss incurred when investing in higher-risk assets such as stocks. For example, the stock market correction that occurred during the “dot.com” crash resulted in the S&P 500 dropping more than 35% from 2000 to 2002 and did not fully recover until 2006. The lesson here is that investing in more volatile assets with a maximum of three years to invest can result in unfavorable outcomes. It may also be advantageous to reduce the complexity of assets.
Certain factors should be considered while choosing a short-term investing strategy to make the best decision: The following are the criteria to consider when selecting the finest short-term investing plans:
- Your investing goals: To determine the amount and type of investment, you should have a clear goal in mind. Assume your child will complete Class 12 in four (4) years and you want to save money for his tuition to study engineering, management, or medicine.
- Your risk tolerance: Are you willing to take chances? Market-linked investment plans involve some risk. Fund managers work hard to ensure that your principal is not only safe but also grows over time.
- Your financial needs: When do you require the funds? Are you okay with the investment being locked in for five (5) years? Do you have any other reserve funds in case of an emergency? Do you need periodic interest inflows, or can the interest be reinvested to help the corpus grow even more?
- Assured Sum: If you are looking for tax-saving plans to take advantage of Section 80C benefits, you should consider Unit Linked Insurance Plans (ULIPs), which provide tax benefits, life insurance, and returns on investment. If the financial return on investment is not your primary goal, you can look into top health insurance plans that provide financial protection during hospitalization while also saving you money on taxes. The best health insurance plans with comprehensive coverage should cover hospitalization expenses as well as provide lump-sum payments for terminal illnesses.
Choose a short-term investment that is safe and helps you save money on taxes. Furthermore, before making a final investment decision, it is crucial to fully comprehend the risk-return profile of the programs.
The options listed above offer their own set of perks and advantages, but they are all qualified for a tax deduction under section 80C of the Indian Income Tax Act. You must weigh each alternative against your particular financial objectives and choose the best one. So take your time, do your homework, and make the best short-term investing decision you can. Assetmonk is India’s fastest-growing real estate platform offering top-quality real estate opportunities with an IRR of 14-21%. We offer a wide range of properties in India’s top metropolitan cities such as Bangalore, Chennai, and Hyderabad. Visit us to start your investment now!
Save Tax on Short-Term Investments FAQ's:
Short-term investing gives the investor more flexibility because they don’t have to wait for the security to mature before receiving cash. Long-term investments, on the other hand, can be liquidated by selling them on the secondary market, but the investor will make less money.
Some ways to reduce tax on short-term stock include holding investments for a year or more, investing through your retirement plan, using capital losses to offset gains, selling investments when income is low, donating your stock and killing two birds with one stone, etc.
One of the best ways to save money on taxes is to invest in equity-linked savings plans. This is because the lock-in term is only three years, which is much smaller than other investment and wealth maturity programs, and it has better liquidity prospects than public provident funds and non-statutory corporations.