When planning to invest funds, you may come across the most common question: for what tenure should the funds be invested? The easiest way to solve this question is to assess your financial objectives & risk acceptance level, investment horizon, etc. Some of the financial objectives are meant for the short term, like buying a car, planning a trip, etc., & some are meant for the long term, such as buying a house, planning retirement, etc. Hence, a short-term investment plan is meant for short-term financial objectives & on the contrary, a long-term investment plan is meant to meet the long-term financial objectives.
What is a Long-Term Investment Plan?
Long-term investments are those investments that are non-current in nature, i.e. that are to be held for a period of more than 1 year. These investments are planned to meet long-term financial goals, such as children’s higher education, children’s marriage, buying a new house, retirement planning, etc. These investments are considered to be secure & safe, & they tend to grow if kept for a longer tenure of time. Some examples of long-term investments are the Public Provident Fund (PPF), stocks, mutual funds, real estate, bonds, ULIP policy, gold, equity funds, fixed deposits, National Pension Schemes (NPS), etc.
What is a Short-Term Investment Plan?
Short-term investments are financial instruments that are held for a short period of time, basically less than one year & are convertible into cash. These investments are best suited for those individuals who want to receive returns along with capital preservation & liquidity maintenance. They attract low-risk & lower returns than long-term investments. Examples of short-term investments are bank fixed deposits, savings accounts, recurring deposits, etc.
Difference between Long-Term & Short-Term Investment Plans
Provided are the differences between Long Term & short term investment plan:
| Basis of Differences | Long Term Investment Plan | Short Term Investment Plan |
| Objective | They are meant to help in wealth creation for a longer tenure, such as retirement. | They are meant to help in the short term, such as buying a car or a bike, or planning a trip. |
| Market Risk | More risk & volatile due to market fluctuations. | Lesser risk |
| Expectations | To receive high returns on investments made | To meet the routine expenses |
| Tenure | For a period of 10 years or more | For a period of 3 years or less. |
Advantages of a Long-Term Investment Plan
Provided are the advantages of a long-term plan:
- Easy to Start With:
The strategies used are quite simple & easy to underst&; they just require you to choose assets & let them grow over time.
- Compounding Factor:
Compounding is a way to earn the returns on the total investment amount & the interest earned thereon, which leads to the exponential growth of funds. The longer the tenure, the more the returns.
- Risk Reduction:
There is very little impact of small market fluctuations in comparison to short-term investments.
Disadvantages of a Long-Term Investment Plan
Provided are the disadvantages of a long-term plan:
- Liquidity
Once the funds are invested, it becomes difficult to access them for a certain period of time.
- Uncertain Returns
The returns offered are not guaranteed, as they are linked to the market.
Advantages of a Short-Term Investment Plan
Provided are the advantages of a short-term investment plan:
- Highly Liquid
They are easy to access, i.e. can be withdrawn whenever required.
- Adjustability
They can be adjusted easily as per the market fluctuations.
- Quicker Gains
They help in making quicker gains.
Disadvantages of a Short-Term Investment Plan
The following are the disadvantages of a short-term plan:
- Limited Wealth Accumulation
They provide a lesser accumulation of wealth with the help of compounding.
- Constant Monitoring Required
It requires regular monitoring to identify investment opportunities.
Planning a Long-Term or Short-Term Investment Plan
Provided are the factors to be considered while planning between a long-term & a short-term plan:
- Financial Objectives
To decide whether to invest in long-term or short-term financial objectives, the financial objectives play a major role. If your financial goals are short-term, invest in FDs, NPS, Real Estate, Gold, Bonds, etc. On the contrary, if your financial goals are short-term, invest in ULIP Policy, RDs, Stocks, etc.
- Risk Tolerance Level
If you want to achieve high returns & are willing to accept high risks, you can opt for long-term investment plans. As these plans are market-linked, they may result in short-term losses but will provide long-term gains.
- Investment Horizon
It is the period for which the funds would remain invested, & plays a vital role in deciding whether long-term or short-term investments will best suit you. Long-term investment is best suited for investors who can wait for a longer duration & bear market fluctuations. On the contrary, short-term investments are best suited for investors who require funds in the short term & need liquidity in their investments.
- Tax Implications
If the long-term capital Gains on the amount invested in equity exceed INR 1 lakh & are held for more than 1 year, they attract a tax rate of 10%. On the other hand &, for short-term capital gains, it is 15%. In case of debt, long-term capital gains on investments held for more than 3 years will be taxed at 20% with indexation; on the contrary, short-term capital gains are taxed as per the income tax slab.
- Diversification
It means maintaining a balance between long-term & short-term investments to build a well-diversified portfolio. This will reduce the overall risk of the portfolio & will help maintain a balance between risks & returns.
Long Term or Short Term: Which is better?
Both plans have their own pros & cons, where short-term plans allow individuals to achieve financial objectives in a shorter span of time & with less risk. On the contrary, long-term investment plans offer higher returns with higher risks. If you want to select one of the two, the decision will depend on future financial objectives, financial strength, risk tolerance level, investment horizon, etc. In short, the long-term investment plan is chosen to meet long-term requirements, & the short-term plan is chosen to meet short-term requirements, i.e. if liquidity of funds is the priority.