Does the tenure of investment matter? Is there a right time to hold or sell investments? If that’s bothering you, read on.
The investment objective is to save for a rainy day and grow wealth. What is the use of all the wealth if it does not help when you require it? That makes it necessary for the investor to time their investment to be short or long term as per their needs as they consider all other factors to make their decision a profitable one.
This article helps you understand short-term and long-term investments and the key differences.
What are Short-term Investments?
You can choose to invest your money for a short period of up to one year. Short-term stock investments are generally less than one year. Such investments are short-term, temporary, or marketable securities. The investors can sell or encash the security within a year or carry it on for another term.
Short-term Stock Investments
The stock that frequently trades in the stock market and is held for less than one year is a short-term stock investment. The profits from such sale proceedings are taxable as short-term capital gains. Day traders or swing traders trade many short-term stock investments that comprise debt securities and shares.
3 Short-term Investments You Should Consider
Short-term investments may be a solid investment route as long as individuals stay focused on their goals and work to achieve them.
Exchange-Traded Funds (ETFs) are inventive and popular securities among Indian investors. ETFs in India are excellent investments for investors struggling to evaluate and pick stocks for their portfolios.
You may learn more about the benefits of investing in short-term ETFs here: Are ETFs Best for Short-term Investing?
They have a lower interest rate risk than intermediate or long-term bonds, making them safe investments even in adverse market conditions.
The short-duration mutual funds invest in debt securities with high returns and low risk from one to three years as per the Securities Exchange Board of India (SEBI). Short-term funds can generate substantially larger returns than bank deposits while also providing much-needed liquidity.
What are Long-term Investments?
Long-term investments are financial instruments held for five years or more. These are investments that may provide more significant returns after some time, usually five years or more.
They generally feature more considerable market risks and more enormous profits, allowing you to invest in riskier market securities. You can profit by purchasing undervalued securities and holding them for a lengthy period to generate substantial returns.
Long-term Investment in Stock Market
Long-term investments allow you time to diversify your portfolio and, if necessary, offset losses. The market swings in a short period are just difficult to measure the performance of your investment.
Things to Consider While Taking Long-term Investment Decision
Cautious investing is intelligent, so it is better to consider the following before making a long-term investment decision.
- Identify your financial goals and invest accordingly.
- Ascertain your risk tolerance and choose suitable securities.
- Have a pre-determined asset mix so that your investments are allocated accordingly.
Difference Between Short-term and Long-term Investments
For better understanding, let us analyze the difference between short-term and long-term investments depending on the following factors:
The two words, short and long, are total opposites of each other and thus are self-defining. A short-term investment is for a short period, and you can consider any asset held for one year or less a short-term investment.
Long-term investments are held for more than five years. Most investors keep these investments for several years and include them in portfolios depending on an investment strategy.
The short-term stock investment period may range from one to three years. However, for tax purposes, a short-term is considered when the investment period is less than a year.
Long-term investments should ideally have a time horizon of more than five years. If the investment tenure is 3 to 5 years, it can still be long-term, depending on the investor’s intention to hold them.
Lower-risk ventures often yield lower profits, but riskier instruments can generate more significant returns.
Long-term investments are riskier because it is difficult to forecast their potential and price volatility. However, as these are held for several years or decades, there is relatively little influence over the continually shifting market.
Whether to invest for the short term or the long time depends on the investors’ investment goals and financial situation. You should also analyze plus and minus points before deciding on one or both, i.e., having a combination of short- and long-term investments in your portfolio.
When Should You Pick Short-term Over Long-term Investments?
You can choose short-term over long-term investment if
- You need money shortly for a planned expense like an upcoming vacation.
- Short-term investments are less risky with lower returns.
When Should You Pick Long-term Over Short-term Investments?
You can choose long-term investments over the short term if:
- You have well over five years to retirement
- You don’t have to bear any huge expenses within the year.
- You want to establish and secure a future.
You cannot say that short-term investments are better than long-term or vice-versa, and all you can do is consider the strengths and weaknesses of the two and note which one is better for you.
Also, as discussed in the article, there are factors to consider before arriving at a decision.
A prudent investor with knowledge of market dynamics will hold a portfolio of securities whose maturities vary. That will be of great help to tide over unforeseen financial contingencies.
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The decision depends on investors’ needs. If there is a need for funds within a year, the short term is better, but investors choose the long-term because it provides access to profits.
The tax efficiency of ETFs makes them excellent long-term investments. However, certain ETFs are index funds and are also profitable for the short term.
Short-term trading can be quite profitable for those with sound knowledge of the market, but it can be hazardous otherwise.
There is no time limitation for owning stocks in India, and you can keep them for as long as you please in physical form or a Demat account.