What is Short Term Investment on Balance Sheet?
Short Term investments, also known as marketable securities, are those financial instruments (debt or equity investments) which can be easily converted into cash in the next three to twelve months and are classified as Current Assets on the Balance Sheet. Most companies opt for such investments on balance sheet and park excess cash in such investments due to liquidity and solvency reasons.
It has two main requirements; first, they should be readily convertible into cash, and the second investor must be willing to sell it within one year.
Top 5 Short Term Investments Options
Cash is a zero interest earning instrument. We will discuss here short term investment options that have better returns with almost no risk.
The following are Top Short Term Investment Options:
#1 – Certificates of Deposit (CDs)
Certificate of deposits is available from three months to seven years. Longer the tenure longer is the interest rate. Shorter the duration less is the interest rate. A certificate of depositsCertificate Of DepositsCertificate of deposit (CD) is a money market instrument issued by a bank to raise funds from the secondary money market. It is issued for a specific period for a fixed amount of money with a fixed rate of interest. It is an arrangement between the depositor of money and the bank. can be availed from the bank. A certificate of deposit is one of the safest investments or savings.
#2 – Short Term Mutual Funds
The mutual fundMutual FundA mutual fund is an investment fund that investors professionally manage by pooling money from multiple investors to initiate investment in securities individually held to provide greater diversification, long term gains and lower level of risks. is managed by trustee mutual funds, and one can hold for short term or long term. For the short term, the fund needs to be selected right. Returns on the mutual funds depend upon the fund manager’s performance, and the investor does not have any control over it. The selected fund must be an open-ended fund so the investor can sell his units in the open market whenever he wishes so. If the fund is close-ended, then the end date and the opening date is decided by the mutual fund company. To keep things simple, mutual funds invest investor’s money on his behalf into the debt or equity marketEquity MarketAn equity market is a platform that enables the companies to issue their securities to the investors; it also facilitates the further exchange of these stocks between the buyers and sellers. It comprises various stock exchanges like New York Stock Exchange (NYSE)..
#3 – Liquid Funds
These are the mutual fund houses investing in too short term Government securities and certificates of deposits and having a short maturity period of 4 to 91 days. In simple language, liquid funds can only invest in securities which has maturity up to 91 days. It is easy to enter and exit from such liquid funds. They have high liquidity value, and they are highly secure as well as tenure is for a very short duration. The return on liquid funds ranges from 4 % to 10 % that means they offer moderate returns depending upon the investment portfolioInvestment PortfolioPortfolio investments are investments made in a group of assets (equity, debt, mutual funds, derivatives or even bitcoins) instead of a single asset with the objective of earning returns that are proportional to the investor's risk profile..
This is one of the widely used short term investment options and an alternative to parking money to build emergency funds. However, some risks are always attached while investing in any type of mutual fund. By analyzing past trends, one can say liquid funds generate higher returns than fixed deposits. Also, saving account returns are less than liquid funds. Investing in liquid funds gives you fair chances of earning higher returns as compared to a normal saving account or fixed deposits.
#4 -Treasuries / Government Short Term Bonds
For short term needs of the government, government issues treasuries. One can opt for that for short term investment. These are backed by government securities and are safe to invest. It needs slightly higher skillsets as buying and selling securities to need a basic understanding of the investments. Treasuries can be issued by the Central Government, State Government, or local municipal body.
#5 – Commercial Papers
Like the Government, privately held companies also need money for the short term. Private companies also issue papers for the short term. Interest rates on commercial papers are slightly higher than Government treasuries. Commercial papersCommercial PapersCommercial Paper is a money market instrument that is used to obtain short-term funding and is often issued by investment-grade banks and corporations in the form of a promissory note. are easy to invest, and practically, it is one of the rarest occasions where the company has defaulted in 91 days’ periods, so it becomes a less risky investment.
Short Term investments always give a better return than cash, which earns a zero % interest rate. Despite its advantages, short term investments still run the risk of inflationRisk Of InflationInflation Risk is a situation where the purchasing power drops drastically. It could also be explained as a situation where the prices of goods and services increase more than expected. Inflation Risk is also known as Purchasing Power Risk., default, and lower returns.
This has been a guide to what is Short Term Investments on Balance Sheet. Here we have discussed the top 5 short term investment options, including Certificate of Deposits, Mutual Funds, Commercial Paper, Treasury Bonds, etc. You may learn more about our articles below on accounting –