Difference between long-term and short-term mutual funds

Learn more about how the fund performance varies according to the tenure of investments.

3 mins
10 July 2023

When one decides to invest in mutual funds, he/she must first decide on the investment horizon. Based on their financial goals and time horizon, investors can choose their long-term or short-term mutual fund investments. Certain types of mutual funds are better suited for different investment tenures.

To make effective decisions, let us read more about long-term and short-term investments in mutual funds.

Long-term investment in mutual fund

When a person decides to remain invested in a mutual fund for a tenure exceeding 1 year, it is known as a long-term investment. Financial experts consider equity funds and hybrid schemes to be appropriate for such investments. A long-term investment can help tackle market volatility and create wealth for various long-term goals. Long term investment in mutual fund allows you to reinvest your earnings, dividends, or interest back into the investment, and increase the potential for growth exponentially.

On our platform we have around 12 different categories of equity and 7 categories of hybrid funds from the best AMCs in the country to choose from depending on your investment needs.

How long to remain invested in mutual funds?

The answer to this will vary from one investor to another. Short-Term Capital Gains (STCG) taxation is applicable when one holds units of equity mutual funds for less than a year. Beyond 12 months, the returns are classified as long-term capital gains. One may want to stay invested longer to benefit from the lower LTCG tax rate. But many people wonder whether a long tenure of around 12 to 24 months is enough for earning adequate returns. It might be enough if the market is on the rise. Investors should note that they may not earn high returns consistently for long-term mutual fund investments. In bearish markets, one may experience long periods of losses.

Many financial experts believe that an investor’s time in the market should be if it takes for him/her to fulfil investment goals. The duration of your goal determines which mutual funds to invest in. Examples of short-term goals include temporarily parking funds or saving money for a vacation. Retirement plans and children’s education are examples of long-term goals.

You can also use the Bajaj Finance SIP calculator to understand the kind of returns a mutual fund will yield depending on its investment tenure.

When to invest and when to exit?

The answer to this will solely depend on the investor. There are two modes of mutual fund investments—Systematic Investment Plan (SIP) and lump sum. If an investor is uncomfortable about making lump sum investments, they can always opt for the SIP mode. This allows people to invest in mutual funds in a regular and disciplined manner.

Financial experts state that people can start investing whenever they wish to. Generally, starting one’s investments earlier is recommended because it helps to create a substantial corpus. There is no ideal time to exit mutual funds as it varies from one individual to another. The duration for which one remains invested depends on one’s financial goals, investment horizon, risk appetite, etc.

You can find over 1200 mutual fund schemes on the Bajaj Finance platform with value research ratings and information about the exit load and expense ratio of each fund for you to make a more informed decision.

Things to keep in mind for investing in long-term funds

Before starting a long-term investment in mutual funds, one should consider the following things:

  • Investors need to have a proper investment strategy to reach their life goals. They must take their risk-taking capacity into account before formulating one. Furthermore, they need to be disciplined enough to stick to the investment strategy

  • A person needs to conduct thorough research to identify the best mutual fund for long-term investment

  • It is advisable to undertake a comparative analysis because it helps in understanding how a certain fund has performed against its benchmark and peers

  • It is important to be patient to earn returns from long-term mutual fund investments

  • Always check the Riskometer tool on our website before investing in a fund. The tool stipulated by SEBI reflects the current risk of the scheme at a given point of time

Short-term investment in mutual fund

When someone invests for tenure between a few days and 1-3 years, it is known as a short-term mutual fund investment. Ultra-short-term debt funds and liquid funds are examples of short-term funds. These are better alternatives to fixed deposits as they offer better returns. But they are subject to market risks.

Things to keep in mind before investing in short-term funds

  • Investors who don't mind taking on some interest rate risk in exchange for better returns can start with short-duration funds

  • In general, these funds produce reliable short-term incomes. However, if interest rates unexpectedly fluctuate, fund prices may experience significant volatility

  • When a short-term fund is redeemed after being held for more than three years, the benefit of indexation kicks in, resulting in lower taxes for investors

Short term vs long-term in mutual funds

Here are some of the differences between short-term and long-term investments in mutual funds:

  • Interest rate
    Short-term funds are not as sensitive to interest rate movements as long-term mutual fund investments.

  • Returns
    Short-term investments generate higher returns compared to traditional investments like fixed deposits. Long-term investments in mutual funds generate even better returns along with the benefit of compounding.

  • Risk
    Short-term mutual fund investments have low risks compared to long-term investments.

  • Goals
    Short-term investments are more suitable for short-term goals like travelling and wedding ceremonies. In contrast, long-term investments are ideal for goals like retirement or children’s education.

  • Duration
    Short-term mutual fund investments are generally meant for tenure of up to 3 years. Long-term mutual fund investments require a minimum tenure of 5 years.

To sum up, people need to check their financial goals, and risk appetites and choose long-term or short-term mutual funds accordingly. Financial experts advise people to start investing as soon as possible as it helps to build a substantial corpus by the time one retires. To get more information on mutual funds and start your investment journey, download the Bajaj Finance app. The app also helps you with tools to manage your investments and hence is a one-stop solution to your investment needs.

Frequently asked questions

Can we hold mutual fund for long term?

Investments in mutual funds need to be held for a specific amount of time in order to provide investors with effective returns. Because it provides your holdings time to develop and perform, these investment vehicles are most effective over the long term. Mutual Funds for the long term have grown in popularity in recent years, according to market demand. 
Usually, a time horizon of five years or more is regarded as long term.

Is long-term mutual fund taxable?

If the gain within a fiscal year exceeds Rs 1 lakh, long-term capital gains tax in equity funds is 10% + 4% cess. Up to Rs 1 lakh, long-term capital gains are completely tax-free.

Can short-term mutual funds be used for emergency funds?

The ideal strategy to create an emergency fund is investing in liquid funds. While liquid funds are low risk, they also provide the potential for higher returns than savings accounts. As a debt fund, they also benefit from advantageous taxation. Gains from the sale of a debt fund after three years are referred to as long-term capital gains and are subject to a 20 percent post-indexation tax.

What are the different types of mutual fund schemes?

The different types of mutual fund schemes are:

  • Equity Mutual Fund Scheme: Invests mostly in equity-related securities and instruments. Equity funds lets you invest in a diversified portfolio which is exposed to different sectors of the economy.
  • Debt Mutual Fund Scheme: Invests mostly in capital-appreciating fixed income assets such corporate and government bonds, corporate debt securities, money market instruments, etc.
  • Hybrid Mutual Fund Scheme: Invests in both equities and debt to strike a "balance" between income and growth. The regular income from the debt instruments gives the returns on such funds more stability.
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