Investment requires patience, commitment, and discipline and it is important to know the type of investment strategy that suits your goals. Appropriate research must be done before venturing into investment. There are a lot of Frequently Asked Questions on investment, which leads us to explain the distinct advantages and disadvantages of short-term investment and long-term investment.
Short Term Investment
These are financial instruments that are traded for a short period, that is between 1 to 3 years. They are meant for immediate or near-future needs. These forms of investment are highly liquidity instruments that involve lesser market risk.
Different types of financial instruments fall under short-term investment. They are Gilt Funds, Treasury Bills, Low Duration Debt Funds, Ultra Short term Debt Funds, Money Market Funds, Bank Fixed Deposit, Post Office Time Deposit, Sweep-in-Fixed Deposit, and Large-cap Mutual Funds.
Long Term Investment
This investment yields higher returns after several years which can be more than 3 years and even about 10years or more and it involves higher market risk. When investing for the long term this involves you investing in aggressive market instruments.
Long-term investment takes on a substantial degree of risk, therefore invest in a secure kind of investment. This is suitable for those trying to save for college funds, retirement, and so on. There are two different types of long term investment, and they include stocks, real estate, and equity mutual funds
DISTINCTION BETWEEN SHORT TERM AND LONG TERM INVESTMENT
Stated below are the distinction between short term and long term investment:
Risk
Though fluctuation in the market can be unpredictable, there is enough time in long term investment to recover from risk. But in short-term investment, there is not enough value of return with respect to inflation.
Time Duration
The time it takes for you to start making a withdrawal from your investment account determines your time duration. The long-term investment duration is 10years and above while short term investment is 3years and below.
Goals
There are different investing goals when it comes to long-term and short-term investments. Short-term investing goals take months or some years while long-term investing goals take years or decades.
Factors To Consider Before Choosing Your Type Of Investment
The purpose of your investment should be clearly known and your expectation should be stated before investing. Here are some analysis that can help determine the type of investment to invest in
Avoid putting all your eggs in one basket
For a safe investment learn to diversify. void investing your funds in one spot. This will hinder you from losing all your investments instantly when the company faces loss.
Age
When age is in your favor the best investment to go for is that of the long term. But if you are closer to retirement or close to retirement it is advised to go for short-term plans. Going for long-term plans at an old age doesn’t suit you because money might be needed in the nearest future for health care or a dream vacation after your retirement.
Pace Factor
Aggressive investment can be done in long-term investment because losing money is less compared to short-term. Even when the market crashes in long-term investment, there is still enough time for recovery.
Risk
There is a possibility that assets exposed to the market may lose value, therefore it all falls back to the type of investment and strategy you choose. Though long term investment has higher risk than short term investment. Before investing, have the knowledge and decide on which type of investment to use or you can discuss the market risk with a professional.
Aims and Objectives
If your plans are for retirement, saving for your kids’ college fees or achieving significant long term goals, long term investment is for you. However, if your objectives are for the nearest future like a vacation, trip, wedding cost, buying a car, short term investment is for you.
Conclusion
To know if long term investment or short-term investment is good, there must be a balance between you and your situation. Your objectives must be clearly known before entering into any of these. You can also diversify your portfolio to include both short-term investment long term investment in order to minimise risk.
This will prevent you from suffering a total loss if the market suddenly crashes. Also, put your risk tolerance and investment goals into consideration when choosing an investment. Consider speaking to a financial representative to help with an investment strategy.