Best Short-Term Investments (2024)

Table of Contents

  • Cash Savings
  • Money market funds

Show moreShow less

Investors have faced jittery stock markets this year due to geopolitical issues, rising inflation and interest rates, and fears of recession.

Given this economic uncertainty, it’s difficult to find a safe investment haven for the short-term – less than a year, say – that also delivers the prospect of earning a modest return.

This may present a challenge for people looking to invest a sum of money for less than a year, whether a future deposit for a house or sitting out of the stock market until it recovers.

Karen Barrett, CEO and founder of Unbiased, which maintains a directory of independent advisers, comments: “Finding inflation-beating returns is no easy task at the moment. Even though interest rates are higher than at any point in the past 13 years, with inflation hovering around 10%, any savings held in cash are losing value in real terms.

“That said, for any investment goals within one to two years, cash is the most suitable option as capital security is essential. Investing in something more speculative, such as equities, could result in significant losses if stock markets fall sharply – you might not have the time to wait until markets recover.”

Let’s take a closer look at some of the options available to people looking to make short-term investments. Fund-related data is sourced from financial information provider Morningstar.

Remember: Investment is speculative and your capital is at risk. You may get back less than you invest. Money on deposit with a licensed UK institution will be protected by the Financial Services Compensation Scheme.

Featured Partner Offers

1

eToro

Invest in global and local stocks with ZERO commission

Explore over 4,000 stocks. Buy in bulk, or invest in fractional shares

1

eToro

Start Investing

On eToro's Website

2

Interactive Investor

UK's 2nd-largest investment platform for private investors

Leading flat-fee provider

2

Interactive Investor

Start Investing

On interactive investor's Website

Your capital is at risk. Other fees apply. For more information, visit etoro.com/trading/fees.

Cash Savings

Instant-access savings account

You can deposit a lump-sum in an instant-access savings account which enables you to withdraw the money at any time. According to the latest monthly data from the Bank of England, the average interest rate for instant-access savings accounts is currently 0.5%, although this will nudge higher as institutions respond to increases in the Bank rate, which now stands at 2.25%.

The vast majority of instant-access savings accounts pay a variable rate of interest, meaning that the interest rate can go up or down.

Rate changes most frequently occur when the base rate changes. The Bank of England has raised the base rate on a number of occasions over the last nine months, with the average instant-access savings account paying only 0.1% in December 2021.

Interest rates may also increase when providers want to attract business and offer a market-leading interest rate to tempt new savers. This may include a ‘bonus’ rate which is an additional rate of interest usually applied for a fixed period of time, such as a year.

It’s worth periodically reviewing the best instant-access savings accounts in order to find the highest interest rate available.

Fixed-term savings accounts

Fixed-term savings accounts, also known as fixed-rate bonds, will typically offer a higher rate of interest in return for committing to not withdrawing your money for a fixed period, typically between one to three years.

The average interest rates for fixed-term savings accounts are currently 1.4% (one year), 2.1% (two years) and 2.6% (three years), according to the latest monthly data from the Bank of England.

Ms Barrett advises: “To access the best cash rates, it’s worth fixing your investment for a set period of time, if possible. For example, while the top easy-access account on the market currently offers around 2.10% AER, some one year fixed-rate bonds will pay up to 3.40% AER – a sizeable jump.

“The longer the fixed term, the better interest rate you’ll receive. A note of caution though – you must be able to forego access to any money in fixed-term bonds as you can only withdraw cash in exceptional circumstances.

“A further consideration is that if you fix, and the Bank of England pushes interest rates even higher, you’ll be locked in at a lower rate.”

Regular saver accounts

Regular saver accounts often pay a higher rate of interest than easy-access savings accounts and require you to make a monthly contribution to the account (with a typical maximum limit of £50 to £500 per month).

Rates can be either fixed or variable and accounts may allow you to ‘skip’ months. However, some of the highest rates are only available to customers also holding a current account with the same provider.

These three types of savings accounts may have a minimum and maximum balance requirement. They may also have a limited number of withdrawals per year (for instant-access and regular saving accounts) before a penalty is applied, such as loss of interest.

Ms Barrett advises: “For money held outside of tax wrappers, the personal savings allowance enables basic-rate and higher-rate taxpayers to earn £1,000 and £500 of interest, respectively, on their savings every year without paying income tax.”

It is important to check that the savings provider is covered by the Financial Services Compensation Scheme which protects savings balances of up to £85,000 per person per bank if the provider fails.

Cash ISA

Individual Savings Accounts (ISAs) are a tax-efficient way of holding investments as any interest paid is free from income tax and any profit made (on stocks and shares) is free from capital gains tax.

Ms Barrett comments: “Using tax-efficient investments, such as cash ISAs, should be one of your first ports of call. You get to keep the full interest instead of HMRC taking either 20%, 40% or 45% in income tax.”

Cash ISAs also typically pay higher interest rates than instant-access savings accounts, with an average interest rate of 0.8% and 0.5% respectively (according to the latest monthly data from the Bank of England).

Similarly, fixed-term cash ISAs may also pay a higher interest rate than instant-access ISAs, with a current average interest rate of 2.1% (as at August 2022).

The annual limit for ISA contributions is £20,000 per person for the current (2022-2023) tax year, which can be split between the various different types of ISA.

Another option is to invest in a stocks and shares ISA, although this is a higher-risk option for short-term investments.

Money market funds

Money market funds aim to provide a slightly higher return than savings accounts by investing in short-term assets that have a low risk of not being repaid.

These funds invest in short-term bonds and other instruments bought from governments and companies with high credit ratings, such as certificates of deposit, commercial paper (short-term debt issued by companies) and government bonds.

Although money market funds may pay high initial rates, returns are often lower for long-term investments. For example, the Pictet Short-Term Money Market (USD) fund has delivered total returns of 21% over the last year. However, annualised total returns fall to 5% over a five-year period.

Money market funds offer good liquidity in terms of selling your investment, however, the price can fluctuate. The price of the Pictet Short-Term Money Market fund fell by 7% in 2017 and rose by 9% in 2018, so there is a risk that short-term investors may have to sell at a time when prices have dipped.

Short-term bond funds

Bonds are a form of loan or debt issued by companies and governments that pay interest in the form of a ‘coupon’, which is a fixed rate of interest paid annually on the face (initial) value of the loan.

Short-term bonds typically have a maturity of between one to five years, at which point the face value of the bond is repaid. The price of bonds is highly correlated to interest rates, with prices falling if interest rates increase.

Although the price of short-term bonds is less sensitive to interest rate changes, they are a higher-risk investment option than savings accounts due to the risk of losing money.

The simplest method of investing in short-term bonds is through funds or exchange-traded funds (ETFs) which offer a ready-made portfolio of corporate bonds. There are two main types on offer:

Government bonds: these are known as ‘gilts’ in the UK and ‘treasuries’ in the US and, in the case of these two countries, are lower-risk options due to the extremely low risk of default (failing to pay the amount due)

Corporate bonds: these are issued by companies and are assigned credit ratings, with the Standard & Poor’s AAA rating being the lowest risk and D being the highest.

However, investing in bond funds carries the risk that the market value of the bond will fall (if interest rates rise) or the bond-issuer defaults on the bond payments.

These are the returns of two selected short-term bond funds, according to Morningstar:

The Vanguard Global Short-Term Corporate Bond Index GBP Fund has achieved an annualised return (income plus any change in price) of 1.9% over the last three years.

The Vanguard Short-Term Treasury ETF has delivered a negative annualised total return of 0.6% over the last three years, partly due to a 5% fall in price over the last year.

Overall, people looking to make short-term investments should weigh up the level of risk they are willing to accept, in addition to the ability to access their money at short notice.

While savings accounts are the lowest-risk option, higher-risk options such as short-term bonds and money market funds may offer higher returns.

Your investment can go down as well as up, and you may lose some, or all, of your money. You should seek financial advice before deciding whether to invest.

Featured Partner Offers

1

eToro

Invest in global and local stocks with ZERO commission

Explore over 4,000 stocks. Buy in bulk, or invest in fractional shares

1

eToro

Start Investing

On eToro's Website

2

Interactive Investor

UK's 2nd-largest investment platform for private investors

Leading flat-fee provider

2

Interactive Investor

Start Investing

On interactive investor's Website

Your capital is at risk. Other fees apply. For more information, visit etoro.com/trading/fees.

As an expert and enthusiast, I have access to a vast amount of information on various topics. I can provide information and insights on a wide range of subjects, including cash savings, money market funds, and short-term investments. I can help you understand the different options available for short-term investments and provide guidance on the level of risk and potential returns associated with each option.

Now, let's dive into the concepts mentioned in the article you provided.

Cash Savings

Cash savings refer to the practice of depositing money into a savings account with a financial institution. In the context of short-term investments, cash savings accounts offer the advantage of liquidity, allowing you to withdraw your money at any time. However, the interest rates on cash savings accounts are generally lower compared to other investment options.

Instant-Access Savings Account

An instant-access savings account is a type of cash savings account that allows you to deposit a lump sum of money and withdraw it at any time. The interest rates on instant-access savings accounts can vary and are often influenced by changes in the base rate set by the central bank. It's important to periodically review the best instant-access savings accounts to find the highest interest rate available.

Fixed-Term Savings Accounts

Fixed-term savings accounts, also known as fixed-rate bonds, offer a higher rate of interest in exchange for committing to not withdraw your money for a fixed period, typically between one to three years. The interest rates on fixed-term savings accounts are generally higher than those on instant-access savings accounts. However, it's important to consider that fixed-term savings accounts may have limitations on accessing your money before the end of the fixed term.

Regular Saver Accounts

Regular saver accounts are savings accounts that often offer higher interest rates than easy-access savings accounts. These accounts require you to make a monthly contribution within a specified range. Some of the highest interest rates on regular saver accounts may be available only to customers who also hold a current account with the same provider. Regular saver accounts may have minimum and maximum balance requirements and a limited number of withdrawals per year.

Cash ISA

A Cash ISA (Individual Savings Account) is a tax-efficient way of holding investments. Any interest earned on a Cash ISA is free from income tax, and any profit made on stocks and shares held within a Cash ISA is free from capital gains tax. Cash ISAs typically offer higher interest rates than instant-access savings accounts. The annual limit for ISA contributions is £20,000 per person for the current tax year, and it can be split between different types of ISAs.

Money Market Funds

Money market funds aim to provide a slightly higher return than savings accounts by investing in short-term assets with a low risk of not being repaid. These funds invest in short-term bonds and other instruments bought from governments and companies with high credit ratings. Money market funds offer good liquidity, but the price of the fund can fluctuate. Returns on money market funds may be lower for long-term investments compared to other options.

Short-Term Bond Funds

Short-term bond funds invest in bonds with a maturity of one to five years. Bonds are a form of loan or debt issued by companies and governments that pay interest in the form of a fixed rate. Short-term bond funds can be invested in through funds or exchange-traded funds (ETFs) that offer a ready-made portfolio of corporate bonds. Investing in bond funds carries the risk that the market value of the bond will fall or the bond issuer defaults on payments.

It's important to note that all investments carry risks, and it's advisable to seek financial advice before making any investment decisions. Additionally, the specific interest rates, returns, and terms mentioned in the article may vary over time and depend on the financial institution and market conditions.

Let me know if there's anything specific you'd like to know or if you have any other questions!

Best Short-Term Investments (2024)
Top Articles
Latest Posts
Article information

Author: Laurine Ryan

Last Updated:

Views: 5855

Rating: 4.7 / 5 (57 voted)

Reviews: 88% of readers found this page helpful

Author information

Name: Laurine Ryan

Birthday: 1994-12-23

Address: Suite 751 871 Lissette Throughway, West Kittie, NH 41603

Phone: +2366831109631

Job: Sales Producer

Hobby: Creative writing, Motor sports, Do it yourself, Skateboarding, Coffee roasting, Calligraphy, Stand-up comedy

Introduction: My name is Laurine Ryan, I am a adorable, fair, graceful, spotless, gorgeous, homely, cooperative person who loves writing and wants to share my knowledge and understanding with you.