Find The Investment Strategy:
Let us assume, you want to buy the latest iPhone 13 Pro. iPhone 13 Pro is priced at 149999 at Amazon. Instead of taking the EMI route, you plan to invest in liquid funds for one year. This liquid fund which you plan to invest in returns an interest rate of 6%. You need to invest just 12,500 every month, to reach your goal.
Did you find?
The investment strategy described in the passage is an example of a short-term investment strategy. The investment horizon is only twelve months, and the investment is made in a liquid fund, which is a type of short-term financial instrument that provides high liquidity and low risk.
When it comes to stock market investing, you can either take a long-term or a short-term approach. Long-term involves investing in stocks with the expectation of holding onto them for several years, with the goal of earning a return through when the initial capital you invested grows and what you earn from dividends. Short-term trading, on the other hand, involves buying and selling stocks over a shorter time, usually within a few days or weeks, to tweak a profit from market movements.
Investment is an essential aspect of financial planning, as it provides an opportunity to grow one’s wealth. However, choosing between long term and short term investment is one of the significant dilemmas in investment. Both these types of investment have their advantages and disadvantages, and the choice of investment strategy depends on your financial goals and objectives.
In this article, we will further explore the differences between short term and long term investment and help you decide which one is the best choice for you.
What is Long Term Investment?
Long term investment refers to investing money in financial instruments for an extended period, generally for more than five years.
Long term investments include assets such as stocks, mutual funds, real estate, and bonds. The primary objective of long term investment is wealth creation and generating returns over an extended period.
Long term investment provides an opportunity to take advantage of the power of compounding, which can result in significant returns over time.
Advantages of Long Term Investment:
Higher Returns: One of the significant advantages of long term investment is that it provides higher returns over a more extended period. The stock market and mutual funds tend to provide higher returns over an extended period, which can significantly increase your wealth.
Power of Compounding: Long term investment allows you to take advantage of the power of compounding. Compounding refers to the interest earned on the principal amount, as well as the interest earned on the interest. Over an extended period, compounding can significantly increase the value of an investment.
Diversification: Long term investment provides an opportunity to diversify the portfolio. Diversification refers to investing in different types of assets, such as stocks, bonds, and real estate, to reduce the risk of losses.
Tax Benefits: Long term investment in certain financial instruments, such as mutual funds and stocks, provides tax benefits. Long term capital gains on stocks and equity mutual funds are tax-free up to a certain limit.
Disadvantages of Long Term Investment:
Illiquidity: Long term investment requires the money to be locked in for an extended period, which can lead to illiquidity. Illiquidity refers to the inability to access money immediately when required.
Market Volatility: Long term investment in the stock market and mutual funds can be subject to market volatility. Market volatility refers to the fluctuation in the market, which can result in a loss of investment.
Limited Flexibility: Long term investment provides limited flexibility as it requires the money to be locked in.
What is Short Term Investment?
Short term investment refers to investing money in financial instruments for a short period, generally for less than a year. Short term investment includes assets such as savings accounts, bank fixed deposits, money market funds, and treasury bills. The primary objective of short term investment is to earn a small return over a short period.
Advantages of Short Term Investment:
High Liquidity: Short term investment provides high liquidity as the money can be accessed immediately when required.
Lower Risk: Short term investment involves lower risk as the money is invested for a short period.
Flexibility: Short term investment provides flexibility as the money can be invested in different financial instruments based on your requirements.
Quick Returns: Short term investment can be beneficial for you if you require money in the short term.
Disadvantages of Short Term Investment:
Low Returns: Short term investment provides lower returns as compared to long term investment.
No Power of Compounding: Short term investment does not provide an opportunity to take advantage of the power of compounding.
Limited Diversification: Short term investment provides limited diversification as it is difficult to invest in different
Who chooses Long-Term Investments?
Do you have a long-term financial goal or objective, such as retirement planning or wealth creation? Then, you should invest in long term investment. Do you have a longer time horizon? Are you willing to take on more risk to earn higher returns over an extended period? Then, long term is your thing.
Investors who have a high-risk appetite and are comfortable with market fluctuations are more likely to choose long-term investments. This is because long-term investments, such as stocks and mutual funds, are subject to market volatility. This can result in a loss of investment. However, over an extended period, these investments tend to provide higher returns, which can offset market volatility.
Long-term investments are also suitable for you if you can afford to lock in your money for an extended period. Investors who have a steady income stream and can invest a portion of their income in long-term financial instruments. This generate higher returns over time.
Furthermore, long-term investments are suitable for you, if you have a long-term financial horizon, such as retirement planning. Investing in long-term financial instruments, such as stocks and mutual funds, can provide an opportunity to grow their wealth and generate higher returns over an extended period, which can be beneficial during retirement.
If you have a long-term financial horizon, a high-risk appetite, and a stable financial situation are more likely to choose long-term investments. However, the choice of investment strategy ultimately depends on your financial goals and objectives, risk appetite, and financial situation. It is always recommended to consult with a financial advisor before making any investment decisions.
Who chooses short term investments?
You can choose short term investment if you have a short-term financial goal or objective, such as saving for a down payment on a house, paying for a child’s education, or taking a vacation. If you require quick and easy access to their money and cannot afford to lock in their money for an extended period, short term is your thing.
If you are risk-averse and do not want to take on too much risk, you are more likely to choose short-term investments. This is because short-term investments, such as savings accounts, bank fixed deposits, and treasury bills, are low-risk investments that provide lower returns over a short period.
Short-term investments are also suitable for investors who require a regular stream of income, such as retirees or those who are unemployed. Such investors can invest in short-term financial instruments that provide a regular stream of income, such as money market funds or bonds.
Furthermore, short-term investments are suitable for you, if you are new to investing and want to test the waters before investing in long-term financial instruments. Short-term investments provide an opportunity to gain experience in investing and to understand how the market works before investing in high-risk, long-term financial instruments.
If you have a short-term financial horizon or require quick access to your money you are more likely to choose short-term investments. However, the choice of investment strategy ultimately depends on an individual’s financial goals and objectives, risk appetite, and financial situation. It is always recommended to consult with a financial advisor before making any investment decisions.
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