Short Term vs Long Term Mutual Funds

Discover the secrets of short-term vs long-term investments in mutual funds. Explore the strategies that aligns with your financial goals.
Short Term vs Long Term Mutual Funds
3 mins
23 Mar 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.

Short term vs long-term investment 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.

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.

Benefits of long-term mutual funds

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

  1. Compounding: Long-term mutual funds harness the power of compounding, where returns are reinvested, leading to exponential growth of the investment over time.
  2. 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.
  3. 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.
  4. 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.

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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.

Who Might Consider Long-Term Investment Strategies?

Investors with a long-term financial horizon, typically ranging from several years to decades, may consider long-term investment strategies. These investors are often focused on wealth accumulation for major life goals such as retirement, buying a home, or funding their children's education. They are generally willing to endure market volatility, as they have time to ride out market fluctuations and benefit from the power of compounding. Long-term strategies often involve equity-oriented mutual funds, which have historically shown the potential for significant growth over extended periods.

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.

Benefits of short-term mutual funds

Short-term mutual funds provide investors with various advantages tailored to their immediate financial needs and risk preferences. These benefits include:

  1. Liquidity: Short-term funds boast high liquidity, enabling investors to swiftly access their funds without incurring substantial penalties or losses, making them suitable for emergency expenses or short-term goals.
  2. Lower volatility: Compared to long-term funds, short-term funds typically exhibit lower volatility, making them an appealing option for risk-averse investors or those with short-term financial objectives seeking stability in their investments.
  3. Flexibility: Investors enjoy the flexibility to reallocate their investments to seize new opportunities without being bound by long-term commitments, offering them the agility to adapt to changing market conditions or investment strategies.
  4. Potential for higher yields: Despite their lower risk profile, short-term funds can still yield attractive returns compared to traditional savings accounts or certificates of deposit, providing investors with the potential for higher yields while maintaining a degree of security.

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.

Who Might Consider Short-Term Investment Strategies?

Short-term investment strategies are suitable for investors with immediate or near-future financial needs. These could include building an emergency fund, saving for a short-term goal like a vacation, or having cash readily available for unforeseen expenses. Such investors prioritise capital preservation and liquidity over long-term growth. They often choose debt funds or money market funds, which are less volatile and offer quicker access to funds. Short-term strategies focus on minimising risk and maintaining the value of invested capital rather than significant wealth appreciation.


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.

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Frequently asked questions

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.

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