Short-term investments are temporary investments or securities designed to provide a safe harbor for cash while it awaits future deployment into higher-returning opportunities. A common time frame for cashing out of short-term investments three-to-12 months, although one-to-three years or even five years is not uncommon for some investors and products.

A short-term investment fund (STIF) is a type of investment fund which invests in money market investments of high quality and low risk. They are commonly used by investors to temporarily store funds while arranging for their transfer to another investment vehicle that will provide higher returns.

How Short-Term Investments Work

Companies in strong cash, position will have a short-term investments account on their balance sheet. As a result, the company can afford to invest excess cash in stocks, bonds, or cash equivalents to earn higher interest than what would be earned from a normal savings account. The goal of a short-term investment—for both companies and individual/institutional investors—is to protect capital while also generating a return similar to a Treasury bill index fund of another similar benchmark.

Requirements for Short-Term Investments

 

There are two basic requirements for a company to classify an investment as short-term. First, it must be liquid. Two examples are equity listed on a major exchange that frequently trades are qualified and U.S. Treasury securities. Second, the management must intend to sell the security within a relatively short period, such as 12 months. A bond that matures within that time frame is also included.

Marketable equity securities include investments in common and preferred stock. An example of marketable debt securities is a bond in another company. These can be short-term and should be actively traded to be considered liquid. Short-term paper has original maturities that are less than one year, such as U.S. Treasury bills and commercial paper.

Examples of Short-Term Investments

 

Certificates of deposit (CDs): These deposits offered by banks and typically pay a higher interest rate because they lock up cash for a given period. They are FDIC-insured up to $250,000.

Money market accounts: Returns on these FDIC-insured accounts will beat savings accounts but require a minimum investment. Keep in mind that money market mutual funds are not FDIC-insured. Accordingly, it's best to study up on these accounts.

Treasuries: There are a variety of these government-issued bonds, such as notes, bills, floating-rate notes, and Treasury Inflation-Protected Securities (TIPS).

Bond funds: Offered by professional asset managers, these strategies are better for a shorter time frame and can offer better-than-average returns for the risk. Just be aware of the fees.

Municipal bonds: These bonds, issued by local, state, or non-federal government agencies can offer higher yields and a tax advantage.

Peer-to-peer (P2P) lending: Excess cash can be put into play via one of these lendings platforms that match borrowers to lenders.

Roth IRAs: For individuals, these vehicles can offer flexibility and a variety of investment options.

Pay off debt: If you have higher-interest debt, consider paying it off before investing it again, especially when market conditions appear shaky. The 4.00% you save on paying off a loan may beat the 2.00% you earn on a deposit elsewhere.

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