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Role of Short Term Investment Vehicles, advantages and disadvantages

The Role of Short Term Investment Vehicles can be well understood if the terms are broken down. The term Role of Short Term Investment Vehicles“investment vehicle” refers to any method by which individuals or businesses can invest and, ideally, grow their money. A short-term investment, also called a temporary investment or marketable security. It is a debt or equity security that is expected to be sold or converted into cash in a period less than one year.

Role of Short Term Investment Vehicles

Short term investment vehicle therefore refers to kind of investments that are generally liquid and mature quickly. What therefore is liquidity? Liquidity is the ability of an investment to be converted into cash quickly and with little or no loss in value. It can be deduced that the role of the short term investment vehicle is to make the investments liquid. The primary reason for the need for liquidity is for emergency cash reserve or to save for a specific short-term financial goal.

Read Also: five Steps of the Investment Process

Advantages of Short-Term Vehicles

  1. High liquidity;  This makes it easy for investors to convert assets to cash. The most liquid asset, and what everything else is compared to, is cash. This is because it can always be used easily and immediately.
  2. Low risks of default;  this lowers the chance of default by companies or individuals on the required payments on their debt obligations. Lenders and investors are exposed to default risk in virtually all forms of credit extensions and hence the need for short term vehicles.

Read also: Investing Decisions Over Investor Life Cycle

Advantages of Short-Term Vehicles

  1. Low levels of return; A return on an investment is the gain or loss on a security in a particular period. Short term investments tend to have low levels of return because of the relatively low risks involved. The term to maturity also impacts on the levels of return. The lesser the period the lower the returns.
  2. Loss of potential purchasing power from inflation; Purchasing power refers to the number of goods or services that a unit of currency can be purchase.  Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. The returns from a short term investment may not have the same purchasing power they had due to inflation over the investment period.

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