Short term and long term investment – confused between which one to choose from? This guide will give you a headstart.
Investment plays a significant role in fulfilling your life goals or instant gratification.
Are you saving for a foreign trip? Or planning for your retirement?
Depending on what your goal is, investment metrics should be determined.
Your time horizon can help you select the best investment plan and tool you should opt for.
You might have heard experts say that there is no shortcut when it comes to creating wealth.
It is a long drawn process. But investments are of two kinds: Short term investment and long term investment.
These forms of investment have their own merits and demerits. So, investors need to gather adequate knowledge before investing their money.
If you are new to investing and confused about which type you should opt for, this article will help you get started.
What are long term investments?
In simple words, long term investments are those where you keep your money for a very long time.
These investments are held for multiple years, such as 10 years or more.
As a result, investors get ample time to take risks and recover from potential periodic decline.
Long term investment plans allow you to create a substantial amount of wealth with high returns, even in aggressive markets.
Popular long term investment instruments
Stocks are the physical representation of a company. When a privately held company offers an IPO to raise funds, shares of the company are then traded in the stock market.
Based on the company's performance, stocks can give you returns up to even 16%, which is the highest in any type of investment.
However, trading in stocks is considered extremely risky. If you want to invest in the best long term stocks, you must have ample knowledge about all the nitty-gritty of the stock market.
Equity Linked Mutual Funds
Mutual funds are another investment avenue that offers substantial returns at moderate risk.
Investing in mutual funds using SIP is an excellent way to build wealth systematically.
Mutual funds do not have any fixed ending date. So, the scope to build wealth is massive. However, some mutual funds have a lock-in period.
Government Savings Schemes
Some government saving schemes such as Kisan Vikas Patra, National Pension Scheme, and even long-term bank fixed deposits are great long term investment options to consider.
However, the returns are much less than those of stocks and mutual funds. But, they are risk-free and offer tax benefits too.
When should you choose long term investments?
Long term or short term – investment strategy is distinguished based on how you use them.
For instance, stock trading can be a short term investment for day traders. But it can also be considered long term if it is held for several years.
It all depends on your investment planning and goals.
If your retirement is decades away
Retirement is one of the major reasons why people start investing, because we all want a comfortable and worry-free life, don't we?
So when we are young, we have enough time to make our own mistakes and learn from them and grow long term investments.
If you are in your 20s or early 30s, consider investing in stocks or mutual funds.
They are a decent asset to grow over a decade, so by the time you stop working and retire, you'll have an ample amount of money saved for the rest of your life.
Saving for kids' education
We want our kids to have the best education, don't we? But it is also a major source of stress for every parent.
It is because the education system is highly expensive nowadays. Be it high school or higher studies – kids' education can cost you several lakhs.
So, start saving and investing toward it early – perhaps as soon as you get married. Thus, you will have decades to prepare.
If you want to be protected from inflation
You might have heard your elders say they built a house for just a few lakh rupees 40 years ago or 50 years ago, and now the same value of a house has grown exponentially over the years!
You might have had your father run the family on just 10,000 rupees, but today it’s extremely hard to sustain ourselves with the same amount. Why do you think that’s because?
The reason lies in the economy-wide increase of price that affects the value of money or assets.
It erodes your purchasing power and reduces the present value of your investment. It equally affects your long term investments.
So, you must make your investments inflation-proof. How do you do it? Here are some simple ways:
- Invest in gold. We are not talking about physical gold. Rather, consider investing in digital gold. It is a safe class and has historically offered immense returns despite inflation.
- Have a 60:40 equity-bond portfolio. Compared to other equity portfolios, this type of portfolio underperforms, but it offers long term sustainability against inflation.
- Invest in Real Estate Investment Trusts. It is historically proven that with rising inflation, real estate values also increase. So, a long run REIT offers sustainable income through dividend payouts.
What are short term Investments?
Short term investment plans include those asset classes that you hold only for a limited period.
It can be 3 months up to 5 years. Short term investment options are highly risk-prone, but they offer very high returns.
The most significant features of a short-term investment are its volatile nature, liquidity, and ability to yield high returns in a short period.
So, if you want to grow your money quickly and are not afraid to take risks, short term investments are meant for you.
Popular long term investment instruments
- Treasury bills: These bills have tenures of 91 days, 182 days, and 364 days. T-bills are highly liquid and can offer returns of up to 4.62%.
- Gilt Funds: These funds are debt funds that invest only in bonds and government-issued fixed-interest securities. Unlike other short term investments, gilt funds are safe and carry minimal risk.
- Ultra short term debt funds: As the name suggests, these funds have a maturity value of 3-6 months. Due to its low lending duration, it is considered among the low-risk funds.
- Low duration debt funds: These funds have a 6 to 12 month maturity period. They offer a relatively higher interest rate and more credit risk.
- Money market funds: These kinds of funds invest in money market assets. They mature within one year.
- Company fixed deposits: Offered by financial and non-banking financial companies, these types of FDs offer tenure of 1 to 5 years at up to 7.70% interest.
- Post office term deposits: These types of FDs offer moderate returns and have maturity periods of 1 to 5 years.
- Recurring deposits: RDs are a great way to save money systematically without the credit risk. You can do an RD of as little as 6 months.
When should you opt for short term investment
Short time investments are ideal if you want to meet your financial goals in a very short time.
Let's discover when short term is the best investment plan for you.
You want to create emergency fund
Emergency funds help you on your rainy days. But should cover your 6 to 12 months' worth of necessary expenses.
Recently, the COVID-19 pandemic has shown the importance of having an emergency fund.
You can easily build one with the above-mentioned investment types.
You should consider your short financial goals
If you are going on a vacation or saving to pay the down payment on your new home, short term investments are a great way to save money.
Based on your needs, you can also invest in shares. Choose the best share to buy for short term that most meets your needs.
If you need some help, let us get you started on your investment journey. Check out our blog on how to start saving and investing.
But remember, whatever type of investment you choose, you should consider your ability to take risks.
If you prefer a safer approach to saving money, consider long-term investments.
They may not offer you as high a yield as short term investments, but they can help you overcome inflation and provide better financial stability in the long run.
Select the best investment plan that suits your needs the most.
Hope you have benefited from this article, and it will improve your investment game.