Short Term Investments – Overview, Advantages & Disadvantages
Short term investment is any investment option, in which the investment horizon varies from few months to a couple of years. While there is no exact definition of the term ‘short term’, however, in general parlance short term investment can extend from over one month to up to 5 years.
The main objective of short-term investment is to earn high returns on investment and capital preservation. However, to earn handsome rewards from investment, it is necessary to take risks and if you wish to avoid taking any risks at all, then government bonds and schemes can be useful for you. But you should always take calculated risk which should be well within the range of your risk profiling. If you are not aware about your risk profile get a risk profile analysis from any of the certified advisors.
As compared to the government schemes and the fixed tenure bonds, investments in stock markets for a short term if planned correctly have the potential to give returned surpassing those given by these fixed return instruments. But for that, you need to fully understand and analyze the various aspects involved with short term investing in stock markets such as research methodology, important sectors, stock selection criteria, investment horizon, risk appetite etc.
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What are Short Term Investments
The most commonly used method for selecting short-term stocks is through fundamental analysis of stocks, based on the turns in the company’s business cycle. While it is the most preferred method of stock market investment, some technical analysis methods which analyze stocks on the basis of longer duration indicators can also be used for short listing stocks for short term investment.
Advantages of Short Term Investment
1. High Liquidity
While investing money in the stock markets with a short term outlook, you have the benefit of being able to withdraw your money anytime you want, if there is an urgent need. Most of the other forms of investments might need a lock in period or might not extend the benefits of returns if you choose to withdraw your money before the maturity.
2. Invest in Derivative Instruments as Well and Earn in Falling Markets
If you plan your investments properly, then you can earn profits in bearish markets as well for short term. Derivatives are trading instruments whose values are derived from the subsequent equities in the cash market. You can choose to invest in derivative instruments such as futures and options which can help you take benefit of the negative market trend and by first selling at high value and later buying at lower value.
3. Agility to Withdraw Funds in Face of Losses
Many people often claim that for investments in stock markets to give proper returns, one needs to simply buy and hold, as many legendary investors like warren Buffett and Rakesh Jhunjhunwala have done. However, it is not always the case. These legendary investors have also made investments in many companies whose share prices have fallen and have led to erosion of their wealth. As a short term investor, your strategy will prevent such losses as you are likely to be more agile and careful of staying away from loss making positions.
Disadvantages of Short Term Investments
1. No Compounding and Long Term Benefits hence, Low Returns
While short term investments have the benefit of being liquid and making use of the volatility in the markets, short term investments often do not give compounded returns or exemplary returns since the time period for which the investment is made is relatively short as compared to long term investment, but far more as compared to intraday trade practices.
2. Taxability on Returns Generated
While short term investments have possibility of decent returns, the money earned though investments is subject to short term capital gains tax. The STCG for shares in India is slated at 15%. As far as shares and stocks are concerned, if the sale of shares is being done within 12 months of purchase, it comes under the ambit of short term capital gains and hence is liable to be taxed as STCG. Similarly, if you sell shares after one year, then the applicable tax is 10 percent if the gains exceed Rs. one lakh.
3. Market Risks Associated
Risk in any form of investments cannot and should not be ignored. Hence, just like any other type of investments, short term investment also bears with it market risk, which can be caused by any sudden change in the market conditions. It is important to do a complete risk analysis before investing in stocks for short term gains, as any sudden negative move can lead to a drop in share prices without giving much opportunity to recover. A risk profile analysis helps you plan your investment considering in point the amount of risk that you should take in the market.
All factors need equal attention and weightage when investing money for the short term. You can also choose to invest in long term or trade in the intraday market is you feel that short term investment is not your pick. This includes the liquidity factor, risk factor, return factor, investment methodology, selection criteria etc. If you feel that you cannot spare time for such an extensive market study, then the best option would be to take help from a registered investment advisor who can guide you to choose the best investment vehicle depending on your financial goal, your risk appetite, investment capital and the right strategy suited for your needs. CapitalVia Global Research Limited is one such SEBI registered investment advisor which has many such investment recommendations for short term investors in the form of research reports and also in the form of quantitative analysis driven recommendations which can help you plan your short term goals more effectively.
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