A comprehensive guide about long term vs short term investments

In a growing economy, it is never enough to simply receive your salary and save a part of it. As they say, money that is lying dormant is as good as money that is slowly but steadily reducing it’s value. Due to the effects of inflation, which is the rise in prices of goods and services, any money that is stagnant and is not growing is surely worth less and less as time goes by.Therefore, it is a good idea to go for a kind of investment with your money, instead of keeping it as it is. The advantages of investment as far outweigh the risks. One of the biggest pros of investing your money is that you’re able to counter the phenomenon of inflation.As your money grows, its value keeps on increasing, thus keeping inflation at bay. But this is just the tip of the iceberg. Investments have such huge potential to grow your money that you can fulfil a lot of your goals and ambitions if you invest your money thoughtfully. Proper investing can help you purchase a house, get a car, plan a vacation, save up for your children’s education and marriage, and finally, have enough funds for a comfortable life after retirement.When it comes to investments, you will find a plethora of options, where you can put your money to gain good returns. There are stocks, mutual funds, real estate, gold, provident fund schemes, fixed deposits and many more. So where exactly should you invest your money? To know where you should invest your money, it is important to first etch out your goals and the main reasons for your investment plan. Investment can be basically divided into two types, long term investments and short-term investments. And these two types of investment should coincide with your short term and long-term goals respectively.

• Buying a car
• Renovating or upgrading your house
• Planning a vacation
• Buying gold or diamond jewelry for your loved one
• Buying an electronic gadget

• Purchasing a house
• Children’s education
• Children’s marriage
• Creating a significant corpus as a legacy for your family
• Saving funds for retirement

A short-term investment is an investment where you put in your money for a relatively shorter period of time. A short term can be anything between a year and three years. Say, you invested in a mutual fund scheme that lasts for a period of three years, and after the tenure is up you cash the earnings. This type of investment is called a short-term investment. The role of a short-term investment is to fulfill your short term goals

Objectives of a short-term investment

• Achieve short term goals

• Easy accessibility to your funds
• Ability to liquidate your funds as and when required
• Greater control over your invested funds

A short term investment is also dependent on the particular stage of life you’re in. Young adults who are below thirty years of age can undertake both short term and long term investments, whereas, elderly persons would be more interested in short term investments. Also, the amount of money invested in short term investments is usually lesser compared to long term investments.

If you’re considering investing your money for a short period of time, look at the following options for short term investment.

Short term fixed deposits

A fixed deposit is one of the safest ways for anyone to invest their money. If you have a cash surplus that you have no idea what to do with, then putting it into a fixed deposit for a number of years would be a good idea. You can choose your fixed deposit tenure to be as short as a couple of years based on your short term goals. It is important to note,however, that the rate of return in fixed deposits is not very significant and it is mostly a way to keep your money untouched with a bit of interest thrown in. Banks offer interest to the tune of 7-8% for fixed deposits. If your goal is to counter inflation, then a fixed deposit is unlikely to cut it and you will have to look at other options.

Savings bank account

Yet another absolutely risk-free option for short term investment would be to put your money in a savings bank account. Yes, with an insignificant interest rate, the returns won’t be as high as other investment options, but there are still many other advantages. A savings bank account is a highly liquid investment, which means that you have instant access to your funds.

Short term mutual funds

Mutual funds are generally considered as a long-term investment for optimum returns. However, since mutual funds involve many portfolios, there are some mutual funds like debt funds and equity funds that are ideal for short term investments. Investing in short term debt funds for periods of 6 to 18 months could be a viable option if you’re looking to invest in mutual funds for a shorter duration.

Buying gold

Buying gold can be considered both as a short term and long-term investment, since the price of gold tends to fluctuate regularly. Make it a habit to buy gold when the prices are low and store it safely. Then when you’re in need of some cash, you can choose a time when the price is higher and sell the gold.

A long-term investment is a type of investment that has a significantly longer duration. Anything above 3 years can be considered as a long-term investment, which can last for as long as 10 or 15 years. The main role of a long-term investment is to fulfill your long-term goals, like building a sizable corpus. A long-term investment gives much higher returns when compared to short term investments due to the longer duration and the power of compounding.

Objectives of a long-term investment:

• Build a sizable corpus
• Create your wealth and leave a legacy for your family
• Make yourself financially strong for the long term
• Achieve higher returns

A long-term investment is ideal if you are young and have just started your career. This will help you achieve your family goals much ahead into the future.

Given below are a few options that you can look at for long term investments.

Public provident fund

A public provident fund or PPF is one of the most preferred long-term investment schemes in India. It is so popular because it is a government initiative and the interest rate is guaranteed by the government of India. Currently, the PPF interest rate is at 8%, which is a good, solid number. The thing that elevates a PPF to an excellent long-term investment scheme is the tax benefit associated with it, because the interest as well as the maturity amounts is completely exempt from tax.

Real Estate

Investing in real estate is a good long-term investment because real estate is considered as an appreciating asset. However, it is obvious that the amount that one can invest in real estate is quite significant and therefore one has to be very careful and patient. The cost of your house may not increase very quickly after you buy, but if you are patient enough, you can see the appreciation and reap the benefits. Moreover, having your own home or renting it out has its own advantages and returns.

Investing via SIP in Mutual Funds

Investing in mutual funds gives excellent returns, provided you’re in it for the long run. The power of compounding allows your initial investment to grow many-fold over the years. And one of the best methods that can be used for this is via a Systematic Investment Plan, or SIP which allows regulated monthly investments that can be as low as Rs 500/-.It is, of course, subject to market risk, but the returns are as good as guaranteed in the long run. Instead of directly investing in stocks, one can invest in mutual funds like debt funds and equity funds to significantly reduce risks. For long term investments, SIP is not the only option. You can even invest a lump sum amount for a long duration into mutual funds and achieve excellent returns after 5 or 10 years.Thus, whether you should invest for a short term or a long term is not a matter of which one is better. It all depends on your requirements. Short term goals can be taken care of with short term investments, but the shorter duration means that the returns will be lesser. On the other hand, long term goals can be achieved via long term investments, which will definitely provide higher returns, but has to be in for longer duration. So, the important thing is to make a list of your short term and long term goals, and plan your investments accordingly.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.