Which is better, short term or long term investment?

Short-term vs long-term investments depend on individual financial goals. Short-term investments offer quick returns and liquidity, suitable for immediate needs. Long-term investments provide higher growth potential over time, ideal for building wealth and retirement planning.

Why is long term better than short term investment?

Long-term investments tend to outperform short-term ones due to the power of compounding. They offer higher growth potential, lower transaction costs, and favourable tax treatment. Additionally, long-term investing allows investors to ride out market fluctuations and benefit from overall market growth.

Which is more expensive short term or long term investment?

Short-term investments typically incur higher transaction costs due to frequent buying and selling activities. In contrast, long-term investments often have lower turnover ratios, resulting in reduced expenses associated with trading, making them more cost-effective in the long run.

What are the disadvantages of short term investing?

Short-term investing may involve higher volatility and lower returns compared to long-term investments. Additionally, short-term gains are subject to higher tax rates, and the need for constant monitoring and frequent trading can increase transaction costs, reducing overall profitability.

Which is riskier, short or long-term?

Short-term investments tend to be riskier due to higher market volatility and uncertainty over short periods. Long-term investments offer the potential to withstand market fluctuations and provide smoother returns over extended periods, reducing overall risk.

How many years are considered long term investing?

Long-term investing typically refers to holding investments for more than five years, although the exact duration may vary depending on individual financial goals and risk tolerance. Generally, longer investment horizons allow for the benefits of compounding and market growth to materialise effectively.

Which short-duration mutual funds are recommended for investment in 2024?

The choice of Short Duration Mutual Funds for 2024 investment depends on factors like historical performance, management expertise, and alignment with individual investment goals.

What is the optimal investment duration for short-duration mutual funds?

The ideal investment duration in short-duration mutual funds varies based on individual financial objectives and risk tolerance, but generally, a duration of 1-3 years is advisable to balance growth potential with risk management.

Where do short-duration mutual funds allocate their investments?

Short-duration mutual funds typically invest in a diversified portfolio of short-term debt instruments, including corporate bonds, government securities, and money market instruments, aiming to optimise returns while managing risk exposure.

How long should one remain invested in long-duration mutual funds?

The recommended investment horizon for long-duration mutual funds depends on individual financial goals, but typically, investors should consider staying invested for 5-10 years or more to maximise potential returns and mitigate short-term market volatility.

In what assets do long-duration mutual funds primarily invest?

Long-duration mutual funds primarily allocate their investments to long-term government securities and corporate bonds with maturities exceeding 7 years, aiming to capitalise on potential returns over extended timeframes.

Are long-duration mutual funds considered high risk?

Yes, long-duration mutual funds are generally considered to carry higher risk due to their longer investment horizon, making them more sensitive to interest rate fluctuations and market volatility compared to short-term investments.

What kind of returns can one expect from long-duration mutual funds?

Long-duration mutual funds have the potential to offer higher returns compared to short-term investments like bank deposits or money market funds, but they also entail greater market risk and may experience periods of volatility.

Short Term vs Long Term Mutual Funds

3 mins

07-May-2024

Short-term vs long-term mutual funds offer distinct benefits tailored to investors' varied financial goals and timelines. Short-term mutual funds typically encompass investments with durations ranging from a few months to a couple of years. These funds are ideal for investors seeking quick returns or those with immediate liquidity needs. They often involve lower risk profiles and may include assets like money market funds or short-duration bond funds.

On the other hand, long-term mutual funds cater to investors with a more extended investment horizon, typically spanning several years or even decades. These funds focus on wealth accumulation over time, offering higher growth potential but with a greater degree of market volatility. Long-term mutual funds commonly invest in equities, balanced funds, or diversified portfolios aiming to generate substantial returns over the long haul. Investors often choose between short-term and long-term mutual funds based on their financial objectives, risk tolerance, and investment timeframes.

Difference between long-terms mutual funds and short-term 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.

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.

What are long duration mutual funds?

Long duration mutual funds aim to capture returns from longer-term fluctuations in interest rates. Unlike ultra-short term funds that focus on very short-term debt (less than a year), long duration funds invest in securities with maturities stretching from several years to even decades, like government bonds. This extended time horizon makes them more sensitive to interest rate changes. When rates fall, the value of the fund's holdings typically rises, potentially leading to higher returns for investors. Conversely, if interest rates climb, the fund's value might decrease. Due to this sensitivity, long duration funds are generally considered suitable for investors with a longer investment horizon (over 5 years) and a higher tolerance for risk.

How do long duration funds work?

Long duration or long-term mutual funds are a specific type of mutual fund that focuses on investing in bonds with maturities stretching beyond 5 years. These bonds can be issued by corporations with strong creditworthiness. The extended time horizon allows these funds to potentially benefit from long-term interest rate trends. However, this long-term focus also exposes them to fluctuations throughout the entire economic cycle, making them inherently riskier compared to other debt funds with shorter maturities.

Features of long-term funds

Consider these factors about long-term mutual funds to make an informed decision:

Fund manager: Long-term funds are overseen by a fund manager who makes investment decisions on your behalf. Their expertise in navigating markets and selecting promising stocks is crucial for your fund's performance.
Investment strategy: You have two main ways to invest: a lump sum, where you invest a larger amount upfront, or a Systematic Investment Plan (SIP) which allows you to consistently invest smaller amounts at regular intervals. SIPs can help with budgeting and potentially benefit from rupee-cost averaging.
Market exposure: Remember, long-term funds primarily invest in equities (stocks) which are inherently risky due to market fluctuations. However, the extended investment horizon allows these funds to potentially ride out market volatility and generate higher returns compared to other asset classes.

Benefits of long-term mutual funds

Long-term mutual funds offer several advantages for investors seeking to build wealth over time. These benefits include:

Compounding: Long-term mutual funds harness the power of compounding, where returns are reinvested, leading to exponential growth of the investment over time.
Lower transaction costs: Long-term funds typically have lower turnover ratios, resulting in fewer buying and selling activities. This minimises the expenses associated with frequent trading, ultimately benefiting the investor in the long run.
Reduced tax liability: Holding investments for more than a year often qualifies for favourable tax treatment, potentially resulting in lower capital gains taxes compared to short-term funds.
Opportunity to ride out market cycles: By holding investments for the long haul, investors have the opportunity to weather market volatility and benefit from overall market growth, thus potentially maximising returns over time.

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.