7 short-term investments in the UK for quick returns

Whereas long-term investments are intended to be bought and held for a long period of time (usually over more than a year), short-term investments have a shorter lifespan (often under a year) and are perhaps better suited to investors looking for more frequent sources of income. Long-term investors may not have such a need for money and may be saving their earnings for future purposes.

Examples of long-term investments include equities such as growth or value stocks, index funds and exchange-traded funds (ETFs). On the other hand, short-term assets may include different types of savings and cash management accounts, bonds, and bond funds. These tend to come with a higher risk of volatility and chance of losses, as investors may be less concerned with building a reputable portfolio and instead more focused on liquidating investments for quick cash.

A savings account with an online bank means that you typically get paid interest on a regular basis. The average interest rate is around 0.5% according to NerdWallet, which is slightly higher than a traditional bank or credit union, which can offer as little as 0.01%.

Before starting your investment journey, you should research which banks offer the highest interest rates and find one that is easy to set up. In the UK, most savings accounts are usually protected up to £85,000 by the Financial Services Compensation Scheme (FSCS)*, although this is per financial institution rather than per account. If your bank were to go bankrupt, this means that any savings up to this amount would be returned to you.

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A short-term bond fund invests in mainly corporate bonds with maturities of less than five years. These pay interest at regular intervals, usually twice a year. Any financial institution can issue short-term debt, including governments and companies that are rated below investment grade.

These types of bonds have a lower interest rate risk than intermediate or long-term funds, although they all perform differently depending on what they’re made up of. For example, some contain high-yield bonds, which have a higher credit risk. Even so, these have shown to perform better historically than other bonds when the market is in a downturn, as seen by the Vanguard Short-Term Bond ETF (BSV). Please remember that past performance is not a reliable indicator of future results.

Although the stock market may be seen as a riskier investment than others on this list, it can still provide short-term gains if the right stocks are chosen. These are typically bought and held for less than a year and may fluctuate in price depending on seasonality, political tension, or the overall economy.

For example, investors could take advantage of the Covid-19 crisis by buying stocks that have appreciated in value, namely defensive stocks such as Costco, Reckitt Benckiser, and AstraZeneca. These all shot up in value within a matter of months of the virus breaking, as they all provide essential services and products to consumers. Investors could also take advantage of stock market trends that come and go, such as the rise in ‘meme stocks’ in 2021 like AMC Entertainment, BlackBerry, and GameStop. These usually see volatile price fluctuations and if monitored carefully, can provide investors with frequent gains.

A cash management account (CMA) is held within a financial institution (typically not a bank or credit union) that allows you to manage your short-term investments through one portfolio. This can include equities such as shares, bond funds, mortgage payments, and other types of taxed investments. Cash management accounts allow investors to perform all their duties simultaneously without having to switch apps or platforms.

CMAs are often seen as an alternative to a traditional checking or online savings account. Some even provide higher interest rates and lower fees, given that they provide online-only services. For this reason, some investors may prefer this type of account, whereas some may prefer a more traditional approach of brick-and-mortar interactions.

A certificate of deposit (CD) is another type of savings account issued by a bank, credit union, or financial institution. These are issued to people depositing money for a specific timeframe at a specific interest rate, which can be range anytime from six months to five years. In return, the issuing bank pays interest. When you finally cash in or redeem your CD, investors may get back the money they originally put in, plus any interest earned.

The main difference between a certificate of deposit and traditional savings account is that CDs come with a fixed term and fixed interest rate. They are also protected up to £85,000 in the UK (due to the FSCS scheme*) or $250,000 in the US (due to the FDIC scheme). They can be seen as one of the safest saving options, although you should remember that all investments ultimately come with risk and shouldn’t be relied on.

Gilts are debt securities issued on loan by the government for short-term investing in the UK, providing a fixed rate of return. The issuing government pays a fixed interest rate to the investor until the bond reaches its maturity date. When this is reached, the government then pays the bondholder the face value of the bond. Government bonds are also referred to treasuries in the US, bunds in Germany, and OATs in France.

This type of investment can be seen as falling between shares and cash in terms of risk and may be suited for less risk-tolerant investors. The bond market is one of the most liquid financial markets, and although gilts are not backed by the FSCS, they are backed by the government, which some may see as equally safe.

A money market account (MMA) is a type of deposit account that, in order to be opened, requires an investor to make a minimum deposit. This is what differs it from a traditional savings account. These tend to pay a higher interest rate also, which may worry some investors due to the risk of inflation, although this is not an equal risk in the short-term as it may be for long-term investors.

A money market fund (MMF) is another type of short-term investment that shares the same name, although the products vary significantly. This mutual fund invests in short-term securities, including government, corporate, and municipal bonds. Investors don’t tend to consider these as safe as MMAs, as they’re not insured by the FSCS, although they do help to spread your investment portfolio over a range of securities.