📊 The Lost Art of Short-Term Investing

Welcome to this week’s Altsights!

The Lost Art of Short-Term Investing

We invest to achieve life goals. Retirement, children’s education, home loan down payment, the next vacation, first SUV and the list goes on…

Now, these goals are spread across your life. 

For most, retirement is in their 50s and 60s. But the next vacation is just around the corner - maybe just a few months away.

So, while the philosophy of long-term wealth creation can be applied to your retirement, your ‘next vacation’ goal doesn’t have the same luxury.

Thanks to the deafening noise around long-term investing, the art of short-term investing has sadly disappeared.

This newsletter is an attempt at making you think about your short-term investment goals and achieving them confidently.

Different from Long-Term Investing

Long-term investing is typically executed using aggressive and risky investment products like stocks and equity funds.

This is because while stocks and equity funds are risky, the risk of investing in them decreases the longer you stay invested in them.

Here’s the chance of generating negative returns from NIFTY 50 for different periods:

It is clear that there is a non-negligible chance of losing money if you invest in NIFTY 50 for up to 3 years.

Note - NIFTY 50 here is a proxy for stocks and equity funds

Top 3 Short-Term Instruments 🏅

Now that we know equity is best avoided for periods up to 3 years, what are the right instruments?

I think the following is the most ever-green list of short-term instruments. 

It hasn’t changed while I have been an investor for 20+ years and is unlikely to change over the next 20+ years.

1. Fixed deposits

2. Liquid funds

3. Arbitrage funds

Let’s look at each of them individually and help you find the right short-term instrument for you. 

The answer will change depending on expected returns, your precise investment horizon, risk tolerance and tax treatment. So, let’s go!

Fixed Deposits 🥇

Fixed deposits is India’s favourite asset class. But sadly, it has been somewhat out of favour since COVID-19, thanks to the super-low interest rate they offered.

But in 2024, FD rates are at their highest level seen in over a decade. It is fairly easy to find FDs that offer 8%+ interest rates.

The best part of fixed deposits is it is among the few instruments that offer absolutely fixed returns. You know exactly what you are going to get when you start a new FD.

Liquid Funds 🥈

Liquid funds are basically baskets of very short term bonds of high quality. These baskets are managed by professional fund managers.

Liquid funds offer almost fixed returns because the underlying bonds have almost fixed yields.

Unlike fixed deposits, liquid funds also enjoy penalty-free withdrawals if withdrawn 7 days after the date of investment.

Arbitrage Funds 🥉

Arbitrage fund managers identify tiny price differences in equity, futures and options markets and make instant trades to benefit from the price differences.

This is generally a low-risk investment approach but still riskier than fixed deposits and liquid funds.

The most unique feature of arbitrage funds is that they are taxed as equity funds which works better for investors in the higher tax brackets.

This is because arbitrage funds are taxed at either 20% (short-term capital gains) or 12.5% (long term capital gains) whereas fixed deposits and liquid funds are taxed at your marginal tax rate.

So, if you are in the 30% tax bracket, arbitrage funds are tax-efficient for you assuming the returns are in the same ballpark.

Summarising

Here’s a quick summary table of all three short-term instruments that I have talked about in this newsletter:

Hope you liked this issue of Altsights.

See you next week!

Cheers,
Madhu,
Founder, Altcase