You can invest in the short term if you are looking for money. You’re likely looking for a safe place to stash your cash until you need it in the not too distant future. Many investors held cash because of the volatility in the markets and the slumping economy. The coronavirus crisis dragged on. Things remain uncertain now that the economy is facing rising inflation. While short-term investments are risk-free, they can offer higher returns than long-term investments.
You’ll be able to have cash whenever you need it instead of spending your money on potentially dangerous investments. Safety is the main thing that investors need to look for in short-term financial investments.
What is a short-term capital investment?
You may be making a short-term financial investment because you have to have the money available at a specific time. Saving for a downpayment on a house, or for a wedding is an example of a short-term investment. The money must always be available. You should not invest in short-term investments for any duration less than three years.
Stocks are a good option if you have a longer-term horizon, at least three to five years (and longer is better), Stocks can offer much higher returns. Stock market returns have been increasing on average 10 percent per year over long periods. However, they are volatile. The longer time horizon allows you to weather the market’s ups and downs.
Short-term investments: Secure but lower yield
Short-term investments are not as safe as long-term ones. A short-term investment won’t allow you to make as much as a long-term one. You won’t be able to invest in the long-term if you only choose certain investments. Also, it’s not a good idea to buy stocks or stock funds. Here’s how to invest for the long term.
However, short-term investments have some advantages. You can access your money at any time you need it. They are also less risky than long-term investments so there may be little to no downside.
Also read: Top 10 Investment Apps
Top short-term investment options in 2022
These are some of the most attractive short-term investments that will still give you some return.
1. Savings accounts with high-yield
High-yield savings accounts at banks and credit unions are a great alternative to cash in a checking or savings account. These accounts typically pay very little interest. A savings account will earn interest on a regular schedule from the bank.
It’s easy to compare-shop high-yield savings accounts because it’s simple to find which banks offer the highest interest rates, and they are easy to set up.
Risk: Savings accounts are insured by the Federal Deposit Insurance Corporation at banks and the National Credit Union Administration NCUA at credit unions. This ensures that you don’t lose your money. These accounts are not at risk in the short term, but investors who keep their money for longer periods of time may experience difficulty keeping up with inflation.
Liquidity: Savings accounts are extremely liquid and can be added to. However, savings accounts allow only six withdrawals or transfers without fees per statement cycle. ( Banks can now waive this requirement. You should be aware of banks that charge fees to maintain your account or access ATMs. This will help you minimize these costs.
2. Short-term corporate bonds funds
Major corporations issue corporate bonds to finance their investments. These bonds are generally considered safe and pay interest at regular intervals (e.g., quarterly or twice per year).
Bond funds are a collection of corporate bonds from different companies. They can be found in many industries and sizes. Diversification ensures that the overall return won’t be affected by a poor bond. The interest will be paid on a monthly basis by the bond fund.
Risk: Short-term corporate bond funds are not insured by the government. They can lose their money. But bonds are generally quite safe, particularly if you have a large number of them. A short-term fund also has the lowest risk of changing interest rates. Therefore, rising or falling rates will not affect the price.
Liquidity: A short-term corporate bond fund that is liquid can be purchased and sold at any time the financial markets are open.
3. Money market account
Money Market Accounts are another type of bank deposit. They usually pay a higher rate than regular savings accounts but they also require a lower minimum investment.
Risk: Make sure you find a money-market account that is FDIC insured so your account can be protected against losing money. There are coverages up to $250,000 per depositor and per bank.
As with savings accounts, the biggest risk to money market accounts is over time. This is because low-interest rates often make it difficult for investors to keep up with inflation. This is not a major concern in the short term.
Liquidity: Money Market accounts are extremely liquid. However, federal laws place some restrictions on withdrawals.
4. Cash management account
Cash management accounts allow you to invest in short-term investments and act much like an Omnibus account. It is possible to invest, make checks, transfer money, and perform other bank-like functions. Robo advisors or online stockbrokers often offer cash management accounts.
The cash management account offers you flexibility.
Risk: Cash Management accounts are typically invested in low-yield money market funds. This reduces the risk. In the case of robo-advisor accounts, these institutions deposit money into FDIC-protected partner banks. If you do business with one partner bank, you may want to ensure that your FDIC deposit coverage is not exceeded.
Liquidity: Cash management accounts have a high level of liquidity and can be withdrawn at any moment. They may even be better than traditional savings or money market accounts that limit monthly withdrawals.
5. Short-term U.S. Government Bond Funds
The U.S. government issues government bonds, which are similar to corporate bonds. Government bond funds buy investments like T-bills and T-bonds, as well as T-notes, mortgage-backed securities, and T-bonds from federal agencies such as the Government National Mortgage Association (Ginnie Mae). These bonds can be considered low-risk.
Risk: Although federal bonds and their agencies are not insured by the FDIC for collateral, they are government promises to repay the money. These bonds are very safe because they are backed by all the faith and credit of America.
A fund of short-term bonds also means that an investor is taking on low-interest rate risk. The price of the bonds in the fund won’t be affected by rising or falling interest rates.
Liquidity: Government bonds, which are some of the most traded assets on the stock exchanges are very liquid. You can buy and sell them at any time the stock market is open.
6. No-penalty deposit certificates
You can avoid paying a penalty fee if your CD is canceled before it matures. CDs can be found at your bank and offer a higher return rate than other bank products like savings accounts or money market accounts.
CDs can be considered time deposits. This means that you agree to keep the money in your account for a certain period of time. It could range from weeks to years depending on which maturity you choose. The bank will pay you higher interest rates in exchange for the security that this money is kept safe.
The bank pays regular interest on the CD. At the end of the CD’s term, the bank will return your principal and earned interest.
In times of rising interest rates, a no-penalty CD might also be appealing. You can withdraw your money and deposit it somewhere else for a higher return.
Risk: CDs have no risk. They are insured by FDIC so that you don’t lose money. While there are no risks with a short-term CD you could miss a better rate because your money is still in the CD. You may lose purchasing power due to inflation if the interest rate is too low.
Liquidity: CDs tend to be less liquid than other investments from banks on this list. However, a no-penalty CD allows you to avoid paying a late termination fee. This allows you to avoid the main element that renders most CDs ineligible.
There are three types of Treasurys: T-bills (T-bonds), and T-notes (T-notes), and each offer the highest yield and security. They are backed by the AAA credit rating from the U.S. Federal government. You might choose to purchase specific securities rather than a government bond fund. This is depending on your needs.
Risk: Individual bonds are not backed or guaranteed by the FDIC. However, they are guaranteed to be repaid by the government, making them very safe.
Liquidity: U.S. Government Bonds are the most liquid bonds available on the exchanges and can be purchased and sold at any time the market is open.
8. Money market mutual fund
A money market mutual fund is not the same as a money-market account. Although they are named the same, they come with different risks, but both are great short-term investments. A money market mutual fund invests in short-term securities such as Treasurys and corporate debt as well as bank securities. You will pay an expensive rate to the fund company for the assets managed.
Risk: Although its investments are generally secure, money market funds, which are FDIC-backed, are less safe than money market accounts. Money market funds are much safer than money market accounts. They can lose money but only during severe market distress. They are among the safest investments and can help protect your money.
Liquidity: Money Market Mutual Funds are relatively liquid and you can access them quickly. You may be able to write checks from the fund but you can only withdraw six times per month.
What makes a good short-term investment?
While there are many characteristics that make good short-term investments, they all share the following traits:
- Stability: Short-term investments that are stable don’t have a lot of volatility, like bonds and stocks. You can count on the money being there for you when you need it. This is often covered by FDIC insurance and a government guarantee.
- Liquidity: Short-term investments are often high in liquidity. This means that you can get the cash quickly. Certain CDs will let you know when money is available. You can also redeem the CD at any time, but it may come with a penalty unless you choose a no-penalty option.
- Low transaction costs: A good, short-term investment is not expensive to make or take out. This is especially true when short-term yields are at historic lows.
These features ensure that your money is safe and available when you need it. This is why short-term investments are so important. On the other hand, you can earn a greater return on long-term investments while having to endure more volatility in the short term. To access the full amount of that money you may have to sell your assets.