Investing is like a Robert Frost poem – “Two roads diverged in a wood…”, and reaching a financially informed decision can make “...all the difference.”
The two metaphorical roads here are short-term and long-term investments.
Your pocket doesn’t feel the pinch when you go cafe-hopping or spend on movies, but investments can be overwhelming, especially while deciding where to put your money. Are you looking for quick gains or want to build your wealth over time? Your financial goals and objectives determine whether you should invest for the short-term or the long-term.
All About Short-Term Investments
As the name suggests, short-term investments involve holding an asset for less than three years. Many investors hold short-term investment plans for several months at most, looking to profit from volatility and near-term gains. A short-term investing period indicates that the trader might look for investment types with relatively low market risk.
However, seeking lower market risk does not guarantee gains or a sustained principal value.
This kind of investment is most suitable for individuals with immediate financial goals or those seeking optimal use of market opportunities. Investors who explore short-term investment strategies save for:
- Vacations: Planning to go on a family or solo trip? You can fund it with your invested money instead of using your credit card and accruing debt.
- Home Renovations: Rather than breaking your FD or taking money out of home equity, short-term investment strategies can help you fund home improvement projects.
- Wedding expenses: If there is a wedding in the family in the near future, you can direct your investments to manage expenses.
Types Of Short-Term Investments
If you want to convert your financial assets into cash within a short period, short-term investments are for you. The following options are some of the best short-term investments ideal for you:
- Savings account: A savings account is one of the most preferred choices, as it offers maximum liquidity, and you can withdraw the funds without any hassle.
- Recurring deposits: If you want your investments to be more flexible, like monthly instead of a lump sum amount, you can opt for recurring deposits. However, the interest earned on them is taxable.
- Liquid funds: These are mutual funds that invest your money in short-term government certificates or securities. Investors can withdraw money from these funds at any time. These offer a high rate of returns ranging from 6%-7% per annum. Since these funds are invested in money market instruments, they are highly secure.
- Treasury bills: T-Bills are government securities issued by the Reserve Bank Of India on behalf of the government. They are highly secure short-term investments, making them an excellent option for risk-averse investors.
All About Long-Term Investments
Long-term investments concentrate on growth over an extended period. Long-term investors invest with the hope that their investments will appreciate in value over time. With more time at your disposal, you can take higher investment-related risks, as longer durations can enable investments to potentially recover from periodic declines in value.
However, such a recovery is not always guaranteed. Any investment can gain or lose value over time, including the possible loss of the principal investment value.
Long-term investment plans might be suitable for investors who to save for:
- Retirement: If you want the second innings of your life to be comfortable, you can build a corpus that financially secures your future.
- College: The cost of living is on the rise, and higher education is getting more expensive day by day. So, long-term investments in financial instruments are the best choice to invest in your child’s future growth.
- Build wealth: If you start investing on Stack’D, you let your money compound and grow over time.
Types Of Long-Term Investments
Long-term investments give you leeway to analyze markets and make sound financial decisions. If you want to invest in long-term plans with higher returns, the following are some of the best options:
- Public Provident Funds (PPF): One of the most popular government-backed saving schemes in India, a PPF is a highly regarded long-term investment strategy. PPF is an ideal option if you are looking for safety, guaranteed returns, and tax benefits in your retirement.
- Mutual Funds: Mutual funds are the best option for investors with a long-term investment horizon, who can take high risks to receive good dividends. A long-duration mutual fund requires an active and thorough review of the fund’s performance on a regular basis. When you invest for the long-term in mutual funds, your portfolio is diverse in various asset classes, geographies, and sectors.
- National Pension Scheme (NPS): A government-backed retirement savings scheme, the NPS is an excellent option for long-term wealth creation. NPS offers a range of investment options across asset classes, government securities, corporate bonds, or equities. So, you can tailor your investment based on your risk tolerance. With NPS’ low maintenance cost, you are also eligible for tax benefits.
Short-Term And Long-Term Investments: Things To Consider Before Investing
Here are a few things you need to consider before forming your investment strategy:
- Timeline to invest: Consider the time between now and the day you start making withdrawals from your investment account. This timeline is a determining factor in opting for a suitable investment strategy.
- Risk appetite: The degree to which you can financially afford to see short-term declines in your investment value determines your risk appetite.
- Income tax rate: If you are looking to avoid or minimise taxes, you have to strategically invest accordingly. For instance, if you want to invest for your retirement, an individual retirement account (IRA) can be your best bet. Here, you can defer paying taxes on your investments until you withdraw the funds.
- The desired rate of return: Investment risks and returns are directly proportional to each other. If you seek high returns, you might expose yourself to higher market risks.
The Long And Short Of It
So, what is the best strategy, you wonder? A mix of both! There is no one-size-fits-all when it comes to investing in financial instruments. Investing in short-term and long-term strategies helps maintain a balance and diversifies your portfolio. No matter the financial vehicle, the key is to align your investments with your financial goals.
Frequently Asked Questions –
1. What are the benefits and drawbacks of short-term investments?
Short-term investments offer the following benefits:
- Liquidity: You get easy access to funds whenever the need arises.
- Quick returns: You don’t have to wait forever to see the results.
- Flexibility: Adjust your portfolio based on market trends.
However, these investments have a few drawbacks as well.
- Lower returns: There is no interest compounded since your money doesn’t get any time to grow.
- Limited growth: Since these are for a short duration, there is limited room for growth.
- Restricted investment options: Options to distribute risk among other assets are unavailable in short-term investment plans.
2. What are the benefits and drawbacks of long-term investments?
Some benefits of long-term investments include:
- Maximum returns: The long duration of these plans enables maximum returns with compounding interest, allowing exponential growth of your wealth.
- Reduced risk: Long-term investments are less risky as you have more time to overcome market fluctuations, which can make up for any potential loss.
Long-term investment plans also have their disadvantages:
- Liquidity constraints: Once you have invested for the long term, it is difficult to access your funds in unexpected circumstances.
- Uncertain returns: While gaining substantial returns is a possibility, it is not guaranteed as you are exposed to market fluctuations or potential economic downturns.
3. Where should I invest my money for good returns?
Diversification is key to yielding profitable returns. You can consider investing in National Pension Scheme (NPS), Debt Mutual Funds, Unit-Linked Insurance Plans (ULIP), Equity Mutual Funds, and Public Provident Funds (PPF).
