Short-term financial investments: What type exist?

17/10/2024
Short-term financial investments: What type exist?

Short-term investment has become one of the most popular strategies among investors. Why? Because it is a type of investment that generally allows for returns within a short period, typically less than a year.

However, a common misconception is that within short-term financial investments, only one type exists. To help you understand this type of business better, we have prepared this article to dive into short-term investments and their types, including crowdlending, as well as their benefits, so you can make informed decisions.

What Are Short-Term Financial Investments?

Short-term investments are financial assets designed to be converted into cash within a short time frame, usually ranging from a few months to a year.

This type of investment is ideal for those seeking quick returns with low risk exposure and greater flexibility to access their capital when needed. After all, these investments are characterized by high liquidity.

However, it is important to consider that not everything is an advantage, as returns tend to be lower compared to long-term investments. Why is this? Because they are less exposed to market fluctuations and risk.

When Is a Financial Investment Considered Short-Term?

When assessing whether an investment can be considered short-term, it is essential to focus on the timeframe. Financial investments are generally classified into three categories:

  • Short-term investments - These have a duration between a few months and a year.
  • Medium-term investments - These are made with a timeframe of one to five years.
  • Long-term investments - These encompass all investments with a time horizon exceeding five years.

However, these timeframes and classifications are not an exact science. There is no single criterion, as in some cases, short-term investments are considered those lasting up to three years, with anything beyond that deemed long-term. With this in mind, all investors agree on their pros and cons.

Advantages and Disadvantages of Short-Term Investing

Among the advantages of these investments are the security and flexibility they offer. Investors have quick access to capital, making it ideal for liquidity needs or to seize market opportunities as they arise.

However, limited returns and restricted earning potential can be seen as disadvantages, especially compared to long-term investments, which tend to offer higher returns.

Types of Short-Term Financial Investments

There are various types of products designed to meet the needs of short-term investors, each with unique characteristics in terms of risk and returns. This ensures that investors can find the ideal option for their specific needs and circumstances.

Fixed-Term Deposits

Fixed-term deposits are one of the most common and secure instruments. By investing in a fixed-term deposit, a specific amount of money is locked in for a set period in exchange for a predetermined interest rate.

This option is appealing to those seeking security and stability in their investments, as the capital is guaranteed. However, what is its drawback? Returns are usually low, and early withdrawal before maturity often incurs penalties.

Short-Term Fixed Income Funds

Short-term fixed income funds invest in bonds and other debt assets that they sell within a brief period. Unlike fixed-term deposits, these funds are not guaranteed, posing a slight risk of capital loss in case of market fluctuations.

These funds offer more attractive returns, making them ideal for those looking for diversification and potentially higher returns compared to traditional savings accounts, with relatively low risk.

Treasury Bills

Treasury bills are debt instruments issued by the government, usually maturing between three and twelve months. These are considered one of the safest options, offering a reliable haven for short-term capital.

Though their returns are generally low, many investors choose this option due to its low risk and government backing. They are recommended for those who prioritize capital safety over returns.

Certificates of Deposit (CDs)

Certificates of deposit (CDs) function similarly to fixed-term deposits but typically offer higher interest rates due to their longer lock-in periods. CDs allow investors to secure a fixed rate of return over a specified period, usually between three months and a year.

While they provide guaranteed returns, remember that they require locking up funds for the agreed-upon period, making them ideal for those who do not need immediate liquidity and prefer to commit their capital within that timeframe.

High-Yield Savings Accounts

High-yield savings accounts are similar to conventional savings accounts but offer higher interest rates. These accounts allow for withdrawals at any time without penalties, making them a perfect choice for those who seek immediate liquidity alongside higher returns.

However, it is essential to note that the generated interest tends to be modest, but this option is attractive for those seeking an alternative to keep their money safe and accessible.

Crowdlending

Crowdlending is an investment alternative we offer at Inversa, where multiple investors finance companies in exchange for returns. Through platforms like Inversa, investors can diversify into various projects with repayment periods ranging from several months to a year, offering higher returns than other short-term options.

This approach allows for selecting projects that match your risk profile and financial goals, providing an opportunity to earn attractive returns while supporting businesses.

What Factors to Consider When Choosing a Short-Term Investment?

Choosing a short-term investment requires analyzing several key factors:

  • Liquidity - This determines how quickly you can retrieve your capital. With Inversa, crowdlending allows you to select projects with terms that match your needs.
  • Risk - Understand your risk tolerance and select products that fit your profile. With crowdlending on Inversa, you can choose from vetted projects and diversify to mitigate risks.
  • Expected Return - Opt for products that balance returns and security according to your financial expectations.

Evaluating these factors will help tailor your short-term investment strategy to your personal needs and financial objectives. Be sure to review performance and market conditions periodically to make adjustments as necessary.

The Importance of Diversifying Short-Term Investments

Diversifying investments is key to maximizing returns and reducing risk, even in the short term. By combining traditional products with alternatives like Inversa’s crowdlending, you can build a balanced strategy that leverages different sources of returns.

By including options like Inversa in your portfolio, you gain greater flexibility and access to opportunities that align with your financial goals.

Ana María Belén Olmos López
Promoter, Founding Partner & CEO of Inversa Invoice Market

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