5 short-term investments in the UK for quick returns: Investors could allocate equal percentages of their investment portfolios to long-term and short-term investment alternatives, particularly if they need rapid returns or a consistent source of income. This article explains the distinction between the two.
Long-term vs short-term investing
Long-term investments are designed to be purchased and held for an extended length of time (typically more than a year), whereas short-term assets have a shorter lifespan (sometimes less than a year) and may be better suited to investors seeking more regular sources of income. Long-term investors may not have such a high demand for money.
Equities such as growth or value stocks, index funds, and exchange-traded funds (ETFs) are instances of long-term investments. Short-term assets, on the other hand, may include various forms of savings and cash management accounts, bonds, and bond funds.
Best short-term investments based on returns
1. Online savings account
When you open a savings account with an online bank, you will normally be paid interest on a regular basis. According to NerdWallet, the average interest rate is roughly 0.5%, which is somewhat more than a typical bank.
Before you begin your investing adventure, investigate which banks give the best interest rates and select one that is simple to set up. The Financial Services Compensation Scheme (FSCS)* protects most savings accounts in the UK up to £85,000, but this is per financial institution rather than each account.
2. Short-term bond funds
A short-term bond fund primarily invests in corporate bonds that have maturities of fewer than five years. These pay out interest on a regular basis, generally twice a year. Any financial entity, including governments and firms rated below investment grade, can issue short-term debt.
These bonds have lower interest rate risk than intermediate or long-term funds, although their performance varies depending on the components. Some, for example, include high-yield bonds, which have a higher credit risk. Nonetheless, the Vanguard Short-Term Bond ETF (BSV) has proven that they perform better than other bonds when the market is in a slump.
3. Stocks and shares
Although the stock market as a whole is considered a riskier investment than the others on our list, it can still yield short-term benefits if the correct stocks are selected. These are often purchased and kept for less than a year, and their prices may change according to seasonality,
For example, investors might profit from the Covid-19 problem by purchasing stocks that have grown in value, such as Costco, Reckitt Benckiser, and AstraZeneca. These all increased in value within months of the virus spreading since they all supply critical services and products to customers.
4. Cash management account
A cash management account (CMA) is a financial entity (usually not a bank or credit union) where you may manage your short-term investments through a single portfolio. This can include stocks, bond funds, mortgage payments, and other sorts of taxable investments.
CMAs are frequently viewed as a viable alternative to traditional checking or online savings accounts. Given that they solely offer online services, some even offer greater interest rates and reduced costs. As a result, some investors may favour this form of account.
5. Money market account
A money market account (MMA) is a type of bank account that needs a minimum deposit in order to be created. This is what distinguishes it from a standard savings account. These also tend to pay higher interest rates, which may alarm some investors owing to the possibility of inflation.
A money market fund (MMF) is a different sort of short-term investment with the same name, but the products differ dramatically. This mutual fund makes short-term investments in government, corporate, and municipal bonds.
What are the advantages?
- Many short-term investments are insured by financial bodies such as the FSCS and protected within a reputable bank or credit union.
- Government bonds and short-term bond funds are part of a highly liquid market, meaning that there are plenty of buyers and sellers to exchange assets. This would mean that an investor can access their short-term cash investment earnings quicker.
- Short-term investments such as savings accounts often cost nothing or very little to open.
What are the disadvantages?
- Long-term investing generally produces a higher rate of return. Value stocks, growth stocks, and index funds or ETFs are particularly popular among long-term investors for their potential to provide large returns over a period of many years, especially when investing in trending stock market themes.
- A short-term strategy may not easily build your overall portfolio, and therefore, some investors may instead choose to have a mix of short-term and long-term investments. This helps to balance risk, diversity of assets, and frequency of income.
Remember that investments that are short-term sometimes contain higher risks, so before making any investing decisions, undertake comprehensive research and examine your financial goals and risk tolerance. Diversification and smart financial planning are essential.