Small Investment Plans – Everything you should know

Small investment schemes are integral to financial planning in India for wealth creation. Individuals choose investment schemes that are aligned with their short and long-term goals. While short-term goals meet various wish lists, long-term planning looks toward a livable future, especially children education, buying house and retirement. 

Small investment plans in India are the best option for investing your money according to your financial capability and the goals you wish to achieve. So, choose the instruments wisely, considering your risk tolerance. Let us dig deeper and learn what a short-term investment is before exploring the various investment options. 

What is a Short-Term Investment?

Before we get to the properties of short-term investments, it is necessary to understand the fundamentals of the best small investment plans. The primary advantage of small investment plans in India is that even a marginal investor can save for the rainy day and achieve a financial goal. 

Best Short-Term Investment Options

When it comes to the best short-term investment plans, you have plenty of options at your disposal. Short-Term Investment plans are not only ideal for small investors, but they also deliver several benefits, including income tax exemptions. Some popular small investment schemes are:

The above list is only indicative, and there are many more options. So, let us look at the chosen few in detail.

Public Provident Fund (PPF): 

One of the oldest government-sponsored small savings schemes, PPF is popular among taxpayers of all categories. The PPF scheme provides triple benefits of long-term retirement savings, stable returns, and security. The critical highlights of the plan are:

1. You can open an account at any bank or post office.
2. The minimum investment required in one financial year is INR 500. 
3. The initial account tenure is 15 years, extendable in 5-year blocks. 
4. Any Indian citizen can open a PPF account for themselves or in the name of a minor. But, the individual can hold only one PPF account.
5. The GOI’s Ministry of Finance notifies the applicable interest rate every quarter during the financial year. 
6. The current rate is 7.10% per annum, valid until September 30 of 2022-23. 

Bank Fixed Deposits:

Bank FD is one of the safest investment options with flexible features for the Indian population. Every bank offers schemes under the FD category that suit individuals’ preferences. Some deposit scheme features are:

1. Open the account in any bank in single or joint names, including minors.
2. There is no limit on the investment amount in different fixed deposit versions under the cumulative and non-cumulative categories.
3. The FD has a tenor from 7 days to 10 years. 
4. Investors get the benefit of interest compounding depending on the deposit tenure.
5. The payable interest rate varies according to the deposit tenure fixed by individual banks.
6. Senior citizens earn preferential interest rates over the normal  rate. 
7. You can withdraw the deposit prematurely or seek a loan by pledging the fixed deposit, adding liquidity to the investment option. 

Systematic Investment Plan (SIP):

Mutual fund investments have emerged as the preferred investment option for higher returns from fund allocation in market instruments. The SIP is an alternative method to investing from the conventional lump sum, allowing small investors to gain benefit from these small investment schemes. The key highlights of the investment option are:

1. You can start a SIP by paying a small amount periodically for converting into units.
2. The minimum investment can be Rs. 500, directly deposited from your bank account.
3. A professional fund manager appointed by the fund house allocates funds on your behalf to maximize returns. 
4. The portfolio created holds diverse assets matching your risk profile.
5. You benefit from the SIP investment due to the power of compounding with reinvestment of the profits.
6. Using rupee cost averaging, you can get more units for less money and strike gold when the market rises.
7. You are assured of fund liquidity as you can redeem the units partially or wholly on a business day based on the latest NAV depending on the mtual fund scheme chosen for investment

National Savings Certificate (NSC):

The NSC is among the popular government-sponsored small investment schemes. But you can purchase the instrument only at post offices. It is ideal for risk-averse individuals seeking to diversify their portfolio options with a fixed income instrument. Some of the critical features of NSC investments are:

1. NSCs are available in denominations of Rs. 100, Rs. 500, Rs. 1000, and Rs. 10000 without any upper investment limit.
2. You can choose from NSC accounts under  three categories:

• Single holder
• Joint certificate “A”or “B.”

3. You can nominate your family member to inherit the asset in case of sudden demise.
4. The GOI’s Ministry of Finance notifies the quarterly interest like all other government-backed small investment plans in India.
5. Accordingly, the current interest rate for the September 2022 quarter is 6.8% per annum, compounded annually.
6. All banks and NBFCs accept NSCs as collateral for extending loans.

Liquid Mutual Funds:

As the name suggests, Liquid Mutual Funds assure fund liquidity to the investor. They are debt funds with short maturity period of up to 91 days. Thus, you lend money to companies for redemption within the maturity date, making the investment safe and liquid. So, the investment is one of the safest mutual fund instruments despite depending on the market to deliver returns. Some key highlights of investment are:

1. Liquid Mutual Funds allocate assets in instruments like Certificate of Deposit (CD), Commercial Paper (CP), and Treasury Bills (T-Bills) with a maturity of up to 91 days.
2. The investment option with short-term underlying securities bears a lower interest rate risk than other debt instruments.
3. Liquid mutual funds do not have a lock-in clause and are redeemable whenever you want. 
4. The instrument is eligible for instant redemption per scheme per day per investor. 

Corporate Deposits:

A Corporate Deposit is a Company Fixed Deposit held by a corporate body for a fixed period paying a predefined interest rate. Banks and NBFCs offer corporate term deposits with different maturity periods. So, the small investment’s salient features are:

1. Corporate deposits pay a higher interest rate than banks for their fixed deposits.
2. The deposit tenure ranges from a few months to a few years and is an alternative investment option.
3. Since corporate deposits do not enjoy DICGC cover of Rs.5 Lac like bank fixed deposits, look for AAA or equivalent rated schemes to ensure the safety of funds.
4. Accordingly, choose ratings of ICRA or CRISIL as the benchmark to conclude your investment option.

Things to Consider Before Investing in a Short-Term Investment Plan:

The primary advantage of short-term investments is that you can monetize the instruments at typical durations of up to 5 years and lower, depending on the investor’s needs. Though there are many small investment schemes to match your preferences, you must choose wisely. So, here are a few tips to sail through the investment horizon for your benefit. 

• Set Investment Goals:

Setting investment goals is the stepping stone for choosing beneficial investment options and making an informed choice. Fixing time frames is essential to meet the objective, but when choosing short-term investments, limit the tenure to 5 years. 

• Analyze investment, return, and risk:

Understanding how each investment instrument works and their potential risks and profits would help. Diversifying your portfolio by exploring ETFs, debt funds, mutual funds, equities, and real estate can help you achieve this goal.

• Invest in High-Yielding Instruments:

Earning high returns is critical for short-term investments to meet your financial goals. Try mutual fund options by sticking to the high-yield, low-risk investments if you need the money in 3 to 5 years.

• Rebalance and reassess your portfolio:

Your portfolio should be reassessed at regular intervals to determine if it needs to be rebalanced. A rebalanced portfolio means re-allocating funds in accordance with predetermined asset allocations. 

• Look to Create a Diversified Portfolio: 

Putting all your eggs in a single basket is not a good idea for short-term investments. On the other hand, choose diverse instruments for a portfolio comprising different assets to negate the possibility of investment risks while ensuring predictable returns. 

Conclusion 

Make an informed choice to make the best of your financial planning now that you have gained sufficient insight into India’s various small investment plans. Saving is ideal when you are young, allowing you options in the short-term and long-term for growing wealth to meet your financial objectives. Nevertheless, making investment decisions too soon can be counterproductive.  So, choose diverse investment plans with thorough research and keep in mind your financial goals. 

Frequently Asked Questions