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:
- 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.
