With varied investment options, you can cater to specific needs and goals. In view of your needs, you may consider investing in short-term investment options or yield returns through a longer tenor with long-term investments. Both investment options have their own share of pros and cons. In light of this, make an investment decision based on your goals and ability to withstand risk.
How do long-term and short-term investment work?
Investments such as stocks, recurring deposits or mutual funds are capable of adding to your principal investment significantly within a short span of time. On the other hand, long-term investments like fixed deposits, real estate, bonds to name a few are capable of giving your higher returns over time. Some investments like mutual funds and FDs can also be invested in for the short or long term depending on your needs and factors like your appetite for risk or the FD interest rate.
For example, you can earn up to 9.10% when you choose cumulative FDs from Bajaj Finance for at least 36 months. You can use an FD calculator to pinpoint the exact value of your investment upon maturity beforehand, which cannot be done with other investment instruments. Although you can use a SIP calculator, your computation will be a forecast rather than a reality.
Thus, it is prudent to understand both types of investments, their benefits and drawbacks, and select one that perfectly suits your financial needs and position. Read on to see how you can differentiate between long-term and short-term investments based on their common parameters.
● Based on the meaning
The definition of short-term investment changes based on the type of investment you consider. Investing in equity for less than a 1 year is considered short-term, and investing in debt for up to 3 years is also considered short-term. Usually, experts define all investments made under 3 years to be short-term and those made for over 3 to be long-term. Certificate of deposits, money market accounts and savings bonds are few short-term investments that can help you earn lucrative returns. On the other hand, you can invest in fixed deposits and zero-coupon bonds over 3 years, as well as in real estate and gold to yield high returns in a long term.
● Based on expectations
If you are planning to invest for retirement or to see your asset or security increase in value over the lengthy horizon you can invest in long-term instruments. However, if you do not expect the increase in your asset value nor do you want to hold it for many years, but earn income for a short duration, you can go for short-term investments. Short-term investments also are a great way to hold your money and earn interest while saving up for a purchase in the near future.
● Based on goals
Invest keeping in mind your financial needs at different points of time in order to achieve your financial goal. If you want to buy a car or go on vacation, you can rely on investments that are for a short duration. However, if you want to hold your funds for a while, earn interest over a prolonged period of time, create wealth for your children or meet other long-term goals, you should choose a long-term instrument. When certain investments, like FDs offer you both options, you can invest either in short-term or long-term fixed deposit based on whatever gives you inflation-beating returns.
● Based on the risk involved
Every investment is associated with a certain amount of risk. This risk can either diminish over time or not. In this scenario, you can choose to invest in long-term instruments to mitigate your risks. For example, experts suggest that mutual funds are best invested in for at least 5 years.
● Based on tax savings
You can also choose short and long tenor investments based on how much tax you can save. For example, ELSS mutual funds can give earn you a lucrative amount in just 3 years while offering you tax exemptions. On the other hand, you may choose to invest in a PPF with a lock-in of 15 years for security and to avail tax benefits.
The best way to go about choosing investments is to highlight your goals and work systematically towards them. Choose a mix of long-term investments and short-term investments to earn better returns consistently. If you are still unsure about where to invest your savings, you can always consult a financial advisor to create a diversified portfolio for you.