Best Short-Term Investments in April 2024 | Bank rate (2024)

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Brian Baker, CFA

Robert R. Johnson

If you're looking to invest money in the short term, you're probably looking for a safe place to stash cash before you need to access it in the not-so-distant future. The good news is that interest rates are higher than ever before, thanks to the Federal Reserve's continued struggle to reduce inflation, and many short-term investments are delivering solid returns.

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Short-term investments minimize risk, but come at the expense of potentially higher returnsbest long term investments. That's why you want to make sure you have cash when you need it, rather than wasting the money on a potentially risky investment. So the most important thing investors should pay attention to in a short-term investment is safety.

What is a short-term investment?

When you make a short-term investment, you often do so because you need the money at a certain time. If you aresavings for a down payment on a houseor a wedding for example, the money must be ready. Short-term investments are investments that you make for less than three years.

If you still have onetime horizon– at least three to five years (and even longer is better) – you can look at investments such as shares. Shares provide a much higher return. The stock market has historically been average with10 percent annually over longer periods– but it has proven to be quite unstable. So the longer time horizon gives you the ability to weather the ups and downs of the stock market.

Short-term investments: Safe but lower returns

The security of short-term investments comes at a cost. You probably won't be able to make as much profit on a short-term investment as you would on a long-term investment. When you invest for the short term, you are limited to certain types of investments and are not allowed to buy riskier assets such as stocks and mutual funds. (But if you can invest for the long term,Here's how to buy shares.)

However, short-term investments have a number of advantages. They are often very liquid, so you can get your money when you need it. They usually arelower risk investmentsthan long-term investments, so you may have a limited or even no downside.

1. High return savings accounts

Overview:INsavings account with high returnsat a bank or credit union is a good alternative to keeping cash in a checking account, which typically pays very little interest on your deposit. The bank periodically pays interest on a savings account.

Who are they good for?A high-interest savings account works well for risk-averse investors, especially those who need money in the short term and want to avoid the risk of not getting their money back.

2. Cash management accounts

Overview:INcash control accountIt allows you to put money into various short-term investments, and it works much like an omnibus account.

Who are they good for?With a cash management account you have a liquid cash account that gives you quick access to your money and on which you can pay interest on your assets.

3. Money market accounts

Overview: Money market accountsare a different form of bank deposits and usually pay a higher interest rate thanregular savings accounts, although they also typically require a higher minimum investment.

Who are they good for?Money market accounts are good for those who need their money in the near future and need to access it without strings attached.

4. Short-term corporate bond funds

Overview: Corporate bondsare bonds issued by larger companies to finance their investments. They are generally considered safe and pay interest at regular intervals, perhaps quarterly or twice a year.

Who are they good for?Bond funds are good for investors who want onevaried portfolioof bonds without having to analyze individual bonds.

They're also good for individual investors who don't have enough money to buy individual bonds, and risk-averse people should like them too.

5. Short-term US government bonds

Overview: Government bondsare similar to corporate bonds, except that they are issued by the U.S. federal government and its agencies.

Government bond funds buy investments such asTreasury bills, T-bonds, T-certificatesand mortgage-backed securities from federal agencies such as the Government National Mortgage Association (Ginnie Mae).

Who are they good for?Short-term government bonds are good for risk-averse investors who want a very safe investment.

Bond funds are good for investors who want a diversified portfolio of bonds without having to analyze individual bonds.

6. Money market associations

Overview:Don't confuse amoney market fund with money market account. Although they have similar names, they carry different risks, although both are good short-term investments.

INmoney Market fundinvests in short-term securities, including government bonds, municipal and corporate bonds and bank bonds.

And because it's a mutual fund, you pay onecost ratioto the fund company from the assets under management.

Who are they good for?Money market funds are good for those who want to have access to their money while earning a return on it.

7. Penalty Free Certificates of Deposit

Overview:INproof of penanceWith , or CD, you avoid the typical fees a bank charges when you cancel your subscriptionCDbefore it ripens.

CDs are term deposits, which means that when you open one, you agree to keep the money in the account for a set period of time, ranging from periods of weeks to many years, depending on the term desired.

In exchange for the certainty that this money is in the safe, the bank pays you a higher interest rate.

Who are they good for?Those looking for some access to their money while earning some interest may find a penalty-free CD useful.

A penalty-free CD can also be attractive during a period of rising interest rates because you can withdraw your money without fees and then invest it elsewhere for higher returns.

8. Treasury

Overview:Government bonds come in three varieties – T-bills, T-bonds and T-bonds – and offer the ultimate in safe returns, backed by the US federal government's AAA credit rating. But it is the government bonds that are short-term, with a maximum term of one year.

Who are they good for?Buying individual government bonds is better for investors who know exactly what type of bond they want, because risks and returns vary from bond to bond.

Instead of buying a government bond fund, you can choose to buy specific securities depending on your needs.

What is a good short-term investment?

Good short-term investments can have many things in common, but are typically characterized by the following three characteristics:

• Stability:Good short-term investments do not fluctuate too much in value, as many stocks and bonds do. The money is there when you need it and is often protected by FDIC insurance or a government guarantee.
• Liquidity:A good short-term investment usually offers high liquidity, so you can quickly access the money invested in it. With certain CDs you know when the money becomes available and you can always exchange the CD, although this often involves a fine unless you opt for a fine-free CD.
• Low transaction costs:A good short-term investment doesn't cost a lot of money to get in or out of, unlike a house, for example. This is especially important when returns on short-term investments are low.

These features ensure that your money is not at risk and will be available when you need it, which is one of the main reasons for short-term investing. In contrast, you may earn higher returns on long-term investments but face more volatility in the short term. However, if you need this money, you may have to sell a long-term investment at a loss to fully access it.

Tips for investing money for five years or less

If you invest money for five years or less, you will need to follow a different process than if you invest with a time horizon of decades. Instead, approach short-term investing with the following tips:

• Set your expectations.Short-term investments have lower potential returns than long-term investments, so it is important to set your expectations correctly.
• Focus on safety.When investing for the short term, you should generally focus on safety rather than returns.Your money should be there when you need it.
• A little extra return may not be worth the extra risk.With short-term investments typically producing low returns, it can be easy to try to earn a little extra return at the cost of much more risk. But focus on why you're investing in the short term.
• Choose the investment based on your needs.Maybeearn what extras on the cd, but what if you need access to the money before it's due? Match your investment type to your needs.
• Not all short-term investments are created equal.Bank products are backed by the FDIC, so you won't lose any principal as long as you doremain within the limits of the FDIC. But market-based products, even safe ones like short-term bond funds, can collapse over short periods of time. Understand the risks of your investments.
  Short-term investments tend to be quite safe, especially compared to long-term investments such as stocks or mutual funds. But make sure you understand what you are investing in.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.