Short Term Investments

Short term investments refer to spending on high-quality investment vehicles that can be converted into cash as early as one day. As a highly liquid option, these allow investors to enjoy the interest benefits over time. In addition, the returns obtained on these investments help individuals meet their short term financial requirements without much struggle.  

Also known as temporary investments, these could be converted into cash in one day to within five years. Such investment options differ from their long-term counterparts, where investors have to wait too long for the investments to mature.

• Short term investments are investments that mature in a day to a few months and help to serve the immediate financial requirements.
• At maturity, these temporary investments get converted into cash easily or become saleable in within a year.
• Some of the best temporary investment options include Certificates of Deposits (CDs), short term mutual funds, commercial papers, government treasury bonds, money market accounts, etc.
• A temporary investment may turn into a long term investment if the assets are held for longer than decided.

Short term investments are classified based on two criteria – these vehicles mature in a couple of months or a few years and become saleable within a year. Therefore, any investment that fulfills these two requirements is categorized as a short-term financial investment option.

Businesses and organizations opt for such temporary investments to ensure they have enough cash to invest in other assets to grow their ventures. For example, the companies that remain in a strong financial position always aspire to retain and even move beyond what they have achieved. Investing in short-term options lets them have additional cash to spend on stocks and bonds, keeping the company’s revenue or profit shares untouched.

Individuals look forward to investing in temporary options when they have frequent short term financial obligations to fulfill. However, when individuals and businesses invest in such financial options, they get a chance to enjoy the benefits of higher interest rates over a period. They make an investment, which they convert into cash or sell in a few months, reaping profits, and then repeat the process, thereby grabbing short-term profits now and then.

Short term investments on the balance sheet find a place in the current asset section. 

When it comes to investing for the short term, there are many short term investments options available for investors. Some of them are:

Certificates of Deposit (CDs)

Certificates of Deposits (CDs) mature as early as three months and can extend up to seven years. The longer the tenure, the higher the interest rate and vice versa. Investment vehicles can be obtained from banks and are considered one of the most reliable and safest temporary investment options. 

The interest rate offered for CDs is far better than other short term financial investment options, given the cash is kept locked for a set time. Moreover, these alternatives are backed by the Federal Deposit Insurance Corporation (FDIC).

Short Term Mutual Funds

Mutual funds can be short term as well as long-term. Based on what can be called a short term option, one needs to select the right deal. Individuals also have an overnight mutual fund option, which matures on a daily basis.

The returns received depend on the performance of the fund managers of the equity market. Therefore, it is recommended that the investors choose an open-ended fund to ensure they are allowed to sell the units as and when desired. On the other hand, if a close-ended fund is selected, the opening and closing dates are determined by the mutual fund company, restricting the investors’ right to sell assets in short-terms.

Money Market Account

It is the short term investing alternative that tends to yield much better returns than savings accounts. Like the CDs, these are also FDIC-insured accounts having specific investment requirements. The insurance offered keeps investors’ amounts protected.

Having this account helps individuals issue checks, and they can use debit cards for various transactions. However, it allows only a limited volume of monthly transactions.

Peer-to-Peer Lending

Also known as P2P lending, it marks the investment option offered to both borrowers and lenders. People with excess cash can help finance seekers and offer them the required amount with a lenient interest applied. 

Such lending practices find relevance for both personal and business purposes. An online broker can help match borrowers with lenders for P2P lending to happen. At the time of repayment, the investor or lender gets the principal amount plus the interest as the total return.

Treasury Bonds

These government-issued treasuries help authorities meet their short term financial requirements. These are backed by government securities and are safe to invest in. However, it needs slightly higher skillsets as buying and selling securities to need a basic understanding of the investments. Treasury bonds can be issued by the Central Government, State Government, or local municipal bodies.

Commercial Papers

The privately held companies issue papers to serve their short term financial purposes, just like the government issues treasury bonds. Interest rates on commercial papers are slightly higher than the government-backed treasuries. 

Commercial papers are easy to invest in and less risky against defaults. Companies obtain them to pay for the inventories and finance their payrolls.

Let us consider the following short term investments examples to understand the concept better:

Example 1

Allen required funds to pay off his debt worth $5,000 in the next five months. Though he had good earnings, his household requirements hardly allowed him to use that amount from his monthly income. As a result, he invested in the CDs to mature in the next three months. At the end of the tenure, the investor received $7,000, of which he paid the amount and added the remaining $2,000 in meeting other additional household needs.

This is how such options work and help individuals.

Example 2

Suppose Company A decides to invest in Amazon shares as a short term investing alternative. After three months, it plans to finance the payroll, including incentives with this money. However, when converting the assets into cash by selling the securities, the market declines and the management decides to hold on to the assets for a few more years until the market stabilizes and the prices go up as expected.

In this scenario, though company A made an investment for short term, its decision to keep the shares for a longer span of a few years converts this temporary investment into a long-term investment.

It might be easy to distinguish between short term and long term investments. However, there are a few points to help investors decide which would be better for them at what time:

1. Short term investing options mature early, whereas long-term alternatives take many years to mature and yield returns.
2. The temporary investment option is the best fit for those who require immediate finance leads. On the other hand, long term investments are meant for long term plans.
3. When one opts for the short term option of investing, it is less likely for the market volatility to affect the investment as it matures and gets ready for withdrawal in days or months. On the contrary, long term investments are highly volatile as they are invested for a longer time.

This is a guide to what are Short Term Investments & their definition. Here we explain the best temporary investments options with practical examples. You may learn more about our articles below on accounting -

• Balance Sheet Ratios Analysis | Types
• Step to Read the Balance Sheet of a Company
• Liquid Assets List
• Short Term vs. Long Term Capital Gains