Long Term vs Short Term Investment

Imagine waking up tomorrow and checking out your bank statement online to find that there’s an extra Rs. 50000 in your account!

You check from where it came and see that it is all from the share dividends. Your day couldn’t have had a better start!

This is everyone’s dream. Everyone wants to gain wealth in a hurry.

In the real world though, it does not work out like that. Sure, you do get profit from your investments, but most of the time, it’s not enough to make you wealthy overnight.

And that brings us to our question: what should you be doing to make yourself wealthy? Should you have long term investments or short term ones? These are your options, and both have their merits and demerits. 

Experts say that you need to do your own research before sending money either way. Don’t try to copy another’s investment strategy either since what is suitable for him may not be suitable for you. It may not sync with your goals and objectives. What you need to do is to take into account your financial goals and risk appetite. In this article, we shall read about the various short term and long term investments.

Short term investments

 These are financial instruments which are traded on the market just for a short period of time. Typically, these are traded for 3 years at the most. Short term investment instruments have high liquidity and lower market risk. Short term investment instruments include:

1. Treasury bills: These are redeemable within 91 days and have high liquidity.

2. Gift funds: These funds just invest in government securities. These are safe investment funds since they have zero credit risk.

3. Ultra short term debt funds: True to its name, the fund matures within 3 to 6 months. These give higher returns.

4. Low duration debt funds: The maturity period for these instruments is a bit longer: 6-12 months. The funds invest in only debt and money market instruments.

5. Money market funds: As the name says, these invest your money only in the money market and are redeemable to one year

6. Bank fixed deposits: Fixed deposits have tenure of 14 days to 10 years.  You can renew the deposits on maturity. Since some banks do not allow premature withdrawals, liquidity can be a problem.

7. Company FD: These come with tenure of more than 1 year.

8. Post office time deposits: These come with tenure of 1-5 years

9. Recurring deposits: The duration here is as low as 6 months

10. Sweep-in FD: These offer higher returns than savings accounts. The maximum tenure is 12 months.

11. Large-cap mutual funds: These funds invest in companies having a large market capitalization which therefore gives you stable returns just after a short time of 1-3 years. The investments have low risk as well.

Long-term investments

Long term investments are those which give high returns after several years, which is generally more than 5 years. Long term investments have more market risk but give much higher returns than short-term investments.

Long term investments enable you to invest in aggressive market instruments. Your options are:

1. Stocks: These are the physical representation of a company. When you own a stock, you own a part of the company. Having stocks is the best way to earn the greatest returns in the market. Long term rewards can be as high as 16%, which is more than all the rest of the investment avenues. However, you need to have solid market knowledge before investing in stocks.

2. Equity mutual funds: This is one more long term investment option through which you can invest in small and mid-cap equity funds for a long time for bigger financial rewards.

Which should you pick? Short term investments of long term investments

As you can see, there’s no clear winner here. Both of these investment strategies have their benefits and downsides. In short term investment, you have lower risk but lower rewards. In long term investments, you have more risk but more reward potential. So if you can handle all the market risk, go for the latter. Otherwise, it is better to play safe with short term investments.