Best Short Term Investments With Up To 20% Returns | 2024

Do not index

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When you think of investing, do you think about stocks, equity mutual funds and the magic of compounding? You are not alone.

Social media has repeated the idea of long term investing so many times that we don’t even think about short term investing.

As a result, crucial short term financial goals tend to take a backseat.

So, we have compiled a list of 10 best short term investments to help you save/invest for your short term goals due within the next 3 years.

A quick heads up: Not all short term investment options are equal.

They have different risk and return profiles, different ideal investment periods and even different taxation. This makes it difficult to choose from the many available options.

So we have summarised everything in an easy-to-consume comparison table of the short term investments towards the end of the article.

In the last section of the article, we have shared a list of investment options that you should avoid for the short term. After all, avoiding the wrong investment is as important as choosing the right investment!

Fixed Deposits (FDs)

The good old FDs have become notorious in recent years thanks to social media influencers.

While FDs are not the most optimal in the long term, they are among the best short term investment options.

FDs have the following benefits that are essential to achieve short term investment goals:

✅ Fixed returns - You know what you will get when you invest in FDs

✅ Flexible - You can choose the interest payout frequency as well the period you want to invest for

✅ Insured - Fixed deposits are insured by an RBI subsidiary up to Rs. 5 lakh per account

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As of April 2024, FDs by reputed banks and NBFCs offer interest rates as high as 8-9%. These are among the highest FD rates seen in India in the last many years.

This makes FDs probably the best short term investment option in 2024.

Government Bonds

What are government bonds and who invests in them?

The government needs funds to build roads, provide subsidies, run welfare schemes among other activities.

To meet the demand for funds, they issue bonds which attract investments from various types of investors - foreign, institutional as well as retail.

How do government bonds work?

Government bonds have varying maturities ranging from 91 days to 40 years.

Government bonds that mature in less than 1 year don’t pay regular interest. They pay the profit at maturity of the bond. Government bonds that mature after 1 year pay regular interest every 6 months.

So, depending on your bond’s maturity profile, you may or may not receive periodic interest payments.

How to buy government bonds?

Government bonds are issued quite regularly. Once issued, they start trading on the stock exchanges and can be bought and sold by market participants.

You can buy a freshly issued government bond or a government bond that trades on the exchange. However, to invest in a government bond that is actively traded, you need to understand how bond pricing works quite well.

In either case, you can purchase government bonds online via your demat account to buy the bond(s) or the RBI’s Retail Direct Portal. RBI’s Retail Direct Platform is a zero commission/brokerage fee platform.

Benefits of Government Bonds as Short Term Investments

✅ Fixed returns - If you hold the bond until maturity, your returns are fixed

✅ No default risk - The government is the most creditworthy institution in the country so your money is very safe

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As of April 2024, government bonds offer returns of 6.5-7% which are not very attractive.

Corporate Bonds

Companies issue bonds to raise funds, just like the government.

How are corporate bonds different from government bonds?

Unlike the government which doesn’t need to generate revenue/profits because it can simply print money, companies need to generate revenue/profits to be able to return money to bond investors.

This makes the financial strength of companies an important factor. The financial strength of companies is represented by ‘credit ratings’ which are assigned by independent ‘credit rating agencies’ like CRISIL, ICRA and CARE.

Credit ratings and interest rates

Imagine a world where all corporate bonds had the same interest rates. In this world, investors would buy the corporate bonds of the financially strongest companies only and all relatively weaker companies would struggle to raise funds.

So, this is not the world we live in.

In fact, credit ratings and interest rates have an inverse relationship. The stronger the credit rating, the lower is the interest rate on offer.

So, almost invariably, you will find a AAA-rated (highest credit rating) bond offering lower interest rates than a BBB-rated (3 notches lower than AAA) bond.

The BBB-rated bond is forced to offer a higher interest rate because if it doesn’t investors would never pick it over AAA-rated bonds. The extra interest rate acts as compensation for the extra risk that investors undertake when they invested in lower-rated bonds.

How do corporate bonds work?

Most corporate bonds offer regular interest payouts. However, unlike government bonds, the frequency of corporate bond interest payouts ranges from monthly to even yearly.

Certain corporate bonds may not pay interest but rather pay the profit at maturity of the bond.

Most corporate bonds also trade on the stock exchange thereby offering liquidity if you would like to sell your bond before it matures.

Benefits of Corporate Bonds as Short Term Investments

✅ Fixed returns - If you hold the bond until maturity, your returns are fixed

✅ Many options to choose from - As we saw, corporate bonds have different credit ratings and hence offer different interest rates. Also, corporate bonds have different interest payout frequencies

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As of April 2024, corporate bonds offer returns ranging between 7-15% depending on its credit rating and other attributes.

Market–linked Debentures (MLDs)

MLDs are fixed instruments with their payoffs linked to the market in some way.

Here’s how the a sample payoff of a hypothetical MLD maturing in Dec 2026:

If the NIFTY 50 index is above the 28,000 mark on 1 June 2025, then the MLD will give you 12% returns. However, if the NIFTY 50 index is lower than 28,000, the MLD will generate 0% returns and only your principal (initial investment) will be returned to you.

The above is called a PP-MLD where PP stands for ‘principal protected.’ Most MLDs in the market have the principal protection feature.

However, if you observe closely, the sample MLD, despite being a fixed income instrument, is linked to the equity market performance. This is not unusual. In fact, most MLDs are linked to the equity market performance.

In most cases, the condition for the MLD to generate returns for investors is a high probability event. But since we are talking about markets in the short term, there is always the possibility that the condition may not be met.

So, it is advisable to invest in MLDs only under professional guidance or after carefully evaluating its conditions.

Securitised Debt Instruments (SDIs)

SDIs are a relatively new investment option. Since SDIs are still not a matured instrument, access to them is not democratised yet. So, we will not discuss SDIs in depth but only introduce them in brief.

Simply put, SDIs are a pool of loans that are repackaged as interest generating instruments. A typical SDI is created through the process of securitisation. Here’s how:

➡️ An arranger (typically a financial institution) takes and structures a bunch of loans issued by an originator (again a financial institution).

➡️ Next, the arranger creates an entity called SPV (special purpose vehicle) and transfers the loans onto its balance sheet. SPVs are trusts which act in the best interests of investors like you and also insulate your money from the originator’s business risks.

➡️ The SPV issues PTC (pass through certificates) to investors like you who can buy them to become shareholders of the trust. PTC holders will receive regular interest payments and their principal will be returned as per the terms of the SDI.

➡️ This process is known as securitisation, hence the name ‘securitised’ debt instruments (SDIs).

While somewhat complicated, it works in the best interests of the SDI investors who get to invest in a pool of diversified assets that is insulated from the business risks of the loan originator.

In case of any problems in this arrangement, the SPV works in the best interests of the SDI investors and tries to sell the loans and return your money back to you.

Debt Mutual Funds

Debt mutual funds are professionally managed baskets of fixed income securities. They are offered by close to 50 AMCs (Asset Management Companies) like HDFC Mutual Fund, SBI Mutual Fund etc.

There are several types of debt mutual funds like liquid funds, dynamic bond funds, gilt funds etc. Let’s look at which ones are ideal for what time horizons (up to 3 years):

Time horizon	Ideal debt fund type
Up to 6 months	Overnight funds, liquid funds
6-12 months	Ultra short funds, low duration funds
12-24 months	Money market funds, short duration funds
24-36 months	Corporate bond funds

Note: Should not be construed as investment advice

Benefits of Debt Funds as Short Term Investments

✅ Affordable professional management - Debt funds help you leverage years of experience of investment professionals at a very affordable cost

✅ Simple taxation - Growth options of debt funds reinvest the interest payments from underlying securities thereby simplifying the taxation process

✅ Many options to choose from - As we saw, several types of debt funds are available to choose from depending on your investment horizon and other factors

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As of April 2024, debt funds offer returns ranging between 6-9% depending on the type of debt fund.

In case you are wondering how do debt mutual funds measure up against fixed deposits, we got you covered. Fixed Deposits vs. Debt Mutual Funds →

Arbitrage Mutual Funds

Arbitrage funds are interesting because they deal in equity derivatives but have a risk-return profile similar to debt funds.

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Arbitrage funds are taxed as equity making them a lucrative short term investment for investors in the higher tax brackets.

Here’s an illustration:

Suppose you are an investor in the 30% tax bracket. Your capital gains from debt funds will be taxed at 30% (irrespective of the holding period). But your capital gains from arbitrage funds will be taxed at:

15% if you withdraw your investment within 1 year [short term capital gains taxation]

10% if you withdraw your investment after 1 year [long term capital gains taxation]

In fact, you also get an exemption of Rs. 1 lakh on long term capital gains on equity investments every financial year. So, if you redeem your arbitrage fund investment in a year where your long term equity capital gains are less than Rs. 1 lakh, your arbitrage fund returns become tax free!

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As of April 2024, the expected returns on arbitrage funds are in the range of 7-8%.

P2P Lending Products

P2P lending refers to lending directly to a retail borrower. This is similar to bonds where you lend money to the government or a company.

However, the government and companies are large institutions with either the ability to print money (government) or the ability to generate revenue/profit. But when you lend to a retail borrower, you don’t know much about their income or its stability.

This is where P2P lending NBFCs come into the picture. These NBFCs are essentially bridges that connect investors (or lenders) to credible borrowers.

The NBFCs have checks in place that lower the risk for investors (or lenders).

Despite this, P2P investing is considered to be riskier than investing in government or high rated corporate bonds.

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To compensate for this risk, P2P lending products offer high interest rates: typically in the range of 9-14%.

Invoice Discounting

Let’s say you are a vendor for a large corporation. You have delivered your services and raised an invoice but the large corporation will pay you after 45 days.

As a relatively small vendor with limited cash on hands, waiting for 45 days is not something you can afford. You need cash as soon as possible to conduct your business.

Suppose that the invoice amount is Rs. 100. Would you be okay if someone paid Rs. 95 today if you agree to make this person the beneficiary of the invoice?

If you ask this question to real service vendors, the answer is a ‘yes!’

Welcome to the world of invoice discounting.

The person who paid Rs. 95 to the vendor in the above example discounted the invoice amount of Rs. 100 by 5%. Let’s call this person the lender.

However, what if the vendor delivered unsatisfactory service to the large corporation? In this case, the lender will be left holding an invoice that is unlikely to be paid partially/completely.

Also, what if the large corporation has had cash flow problems and they surface right when the invoice is due? The lender may face delays in getting the invoice amount settled.

These are the risks the lender or the new beneficiary of the invoice undertakes while discounting the invoice. The greater the risks they see, the greater the discount they demand.

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Despite the impressive expected returns (12-16%), invoice discounting is quite risky. It is also a very short term investment instrument - typically 30-120 days which makes it unsuitable for slightly longer investment periods.

Asset Leasing Products

Air planes, large construction equipment/machinery and warehouses have more than one thing in common.

First, they are critical assets for some of the largest industries in the world. Second, they are really, really expensive.

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To clue you in, the Airbus A320 which is widely used by domestic Indian airlines costs a whopping $100+ million (that’s more than Rs. 800 crore!).

Such expensive assets are generally not bought outright by businesses. Instead, businesses lease them. In exchange, the actual owners of the assets receive a monthly payment (think of this as rent) from the businesses.

How does asset leasing work?

Many platforms offer ‘asset leasing’ as an investment option where they pool money from investors like you. This money is used to buy assets as per a business’ requirement.

The platform then leases the assets to the business on your behalf. It also collects monthly payments from the businesses and transfers them to investors like you.

This is just one of the structures of an asset leasing product. Different structures exist but the underlying idea is the same across all.

Asset Leasing Products are Risky!

At the end of the day, there’s a business that needs to generate cash flows to be able to make regular lease payments. The biggest risk in asset leasing is involvement of a borrowing business of questionable financial strength.

Another risk is that the asset is no longer critical or even becomes obsolete for the business. The business is not incentivised to make the lease payments.

Broadly speaking, asset leasing products are probably the riskiest short term investment options presented in this article.

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To compensate for the high risk associated with them, asset leasing products offer very high returns in the range of 12-20% as of April 2024.

Tabular Comparison of Short Term Investment Options

Investment option	Nature of returns	Expected annual returns*	Risk profile	Ease of withdrawal	Minimum investment	Feature(s)
Fixed Deposits	Fixed	7-9%	Very low risk	Very easy	Rs. 5,000	Insured up to Rs. 5 lakh
Government Bonds	Fixed if held to maturity, otherwise market-linked	6.5-7%	Very low risk	Easy	Rs. 10,000	The only zero credit risk option
Corporate Bonds	Fixed if held to maturity, otherwise market-linked	8-14%	Low risk for AAA and AA rated bonds, otherwise moderate/high risk	Moderate	Rs. 10,000 or Rs. 1 lakh depending on the bond	Lots of options to choose from
Market-linked Debentures (MLDs)	Market-linked	0-12%	Moderate risk	Moderate	Rs. 1 lakh	Returns are mostly linked to the equity markets
Securitised Debt Instruments (SDIs)	Fixed if held to maturity, otherwise market-linked	8-12%	Low to moderate risk	Moderate	Rs. 1 lakh	Diversified
Debt Mutual Funds	Market-linked	6-9%	Low to moderate risk	Very easy	Rs. 500	Diversified by investment professionals
Arbitrage Mutual Funds	Market-linked	7-8%	Low to moderate risk	Very easy	Rs. 500	Enjoy equity taxation (15% up to 1 year, 10% otherwise)
P2P Lending Products	Fixed	9-14%	Moderate to high risk	Easy to moderate	Rs. 10,000	Daily accruals
Invoice Discounting	Fixed	12-16%	High risk	Moderately difficult	Rs. 50,000	Maybe protected by trade credit insurance
Asset Leasing	Fixed	12-20%	High risk	Moderately difficult	Rs. 50,000	Offer among the highest short-term rates

*Expected returns as of April 2024

Avoid these investments for the short term

We had a look at some of the most suitable investment options for the short term (up to 3 years).

Now, let’s look at some investment options that you should avoid for the short term and why:

Investment Option	Why avoid for short term	Long term prospects
Stocks (direct equity)	Unpredictable returns	Depends on the skills of the stock picker
Equity mutual funds	Unpredictable returns, exit load implications	Very good for long term wealth creation
Derivatives trading	Always avoid as the odds are stacked against you. A research report by SEBI showed that 90% derivatives traders lose money	-
Cryptocurrencies	Always avoid as they are not properly regulated in India yet	-

Apart from these, always avoid:

High volatile investments in the short term

Semi-regulated/unregulated investment products that may put your capital at risk, irrespective of investment horizon

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Happy investing!

Best Short Term Investments in 2024 (Up To 20% Returns)