Difference between long-term and short-term mutual funds

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

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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.

Disclaimer

Bajaj Finance Limited (“BFL”) is a Non-Banking Financial Company carrying the business of acceptance of deposits, providing lending solutions to Retail & Corporate customers, and is a Corporate agent of various insurance Companies. BFL is also registered with the Association of Mutual Funds in India (“AMFI”) as a distributor of third party Mutual Funds (shortly referred as ‘Mutual Funds’).

BFL does NOT:

(i) provide investment advisory services in any manner or form;

(ii) perform risk profiling of the investor;

(iii) carry customized/personalized suitability assessment;

(iv) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.


In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on ‘As-is’ basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme /Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities. The NAV will inter-alia be exposed to Price / Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other / better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

Bajaj Finserv Direct Limited, (“BFDL”), a wholly owned subsidiary of Bajaj Finserv Limited (is a Registered with SEBI as an Investment Advisor with Registration no. INA000016083). BFDL enables resident Indian customers to directly invest in third party mutual funds through its online platform. BFDL entered into a referral arrangement with BFL, whereunder, BFL may, without risk or responsibility on its part, refer the resident Indian customers who are interested in placing their investments in Direct Mutual Funds through BFDL online platform. Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.

Disclaimer on Risk-O-Meter:
Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc. and shall also consult their financial advisers, if they are unsure about the suitability of the scheme before investing

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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