Short-Term vs Long-Term Investments – Which Is Better?
Investing your excess capital in different assets lets you earn a steady income and prepare adequate savings for your retirement. Many investment options are available on the market suitable for investors with different risk tolerances and financial objectives. However, each of these investments comes with its own risks and limitations.
Understanding how to avoid such risks and earn maximum returns from your investments is important. One of the most important factors is your investment horizon, which affects an asset’s returns and risk levels.
Long-term and short-term investments are the two primary types based on tenure. Read the details below to understand how they work, their types and their differences.
What Are Short-Term Investments?
Investments made for a short time to satisfy investment objectives aligned with instant liquidity are short-term investments. These usually have a maximum tenure of 5 years, whereas they can be as short as 3 months to a year. However, investments sold or withdrawn within a year are commonly referred to as short-term investments.
Short-term investments include bank deposits, debt funds, corporate bonds, government securities, etc. These typically have high liquidity and offer quick returns. Hence, they are ideal for risk-averse investors who want to protect their capital and do not want the volatility of equity investments. Regular investors and institutions looking to park their funds temporarily also prefer these investments.
As mentioned above, short-term investments for companies refer to such holding of a company which it intends to sell/redeem within a year. The objective of such an investment for investors is not to provide the highest return but easy liquidity with some decent returns. Hence short-term investments offer comparatively lower returns. However, they are much less volatile.
In short, companies and individuals invest in these assets to generate marginal returns using their excess capital and to protect their wealth from losses.
What Are the Different Types of Short-Term Investments?
Several financial instruments have the features of short-term investments like high liquidity and short tenure is types of short term investments. Some popular short-term investment options are mentioned below.
- Fixed Deposits
Depending on an investor’s choice, these have a maturity of 1-5 years. FDs are one of the safest investments (as principal and interest amounts up to Rs 5 lakhs are covered by DICGC) and provide fixed interests regardless of market conditions. However, they may have low liquidity as some banks often do not allow premature withdrawals, while others charge a penalty.
- Recurring Deposits
Recurring deposits are quite similar to fixed deposits and have the same features. However, one difference in regular deposits is that an investor has to invest his capital in smaller amounts at equal intervals (generally monthly) over a fixed period.
- Treasury Bills
These are government-issued debt securities with very high liquidity, which can be redeemed within approximately 91 days to 364 days based on the features of the respective T-bills. They are zero-coupon debt securities issued at a discount. You can make profits by redeeming them at their face value.
- Debt Funds
These mutual funds invest primarily in debt instruments like corporate bonds, government securities and money market instruments. Such funds are comparatively safer among mutual funds since they offer moderate returns within short investment periods.
- National Savings Certificate
It is a government-backed initiative that promotes small savings in India. It is a fixed return scheme which allows a minimum investment of ₹1,000 at a fixed rate of 6.8% fixed annual interest (current rate). It carries a 5-year lock-in period, which makes its liquidity lower than the above short-term investments. Investment in NSC offers tax deductions of up to ₹1.5 lahks under Section 80C of the Income Tax Act. However, interest on NSCs is taxable as per your tax slab.
What Are Long-Term Investments?
Investments meant for extended periods with high return potential are long-term investments. These investments are made for a time period of at least over three years and can go up to a very long tenure. It is common to continue investing in these assets for over 10 years.
The main objective of this kind of investment is to earn high returns and to avert market-related risks by keeping the capital invested long enough. As these assets offer high potential returns, the long investment horizon gives them the time to recover from losses due to market fluctuations. Thus, over the long term, they typically offer substantial returns.
What Are the Types of Long-Term Investments?
- Real Estate
Homes, buildings, flats, plots of land, and real estate investment trusts (REITs) fall under real estate investments. People usually invest in these assets for the long term, which can stretch for decades. They offer high returns over the long term from capital appreciation and rental income.
- Mutual Funds
These funds invest in equities and equity-related instruments with capital collected from many investors and managed by a fund manager. The advantage of an equity fund is that it allows you to invest in a wide range of stocks with a low ticket value. As these are equity-related funds, they carry high risks and require you to invest for a long time.
Equity shares or stocks are securities that offer a percentage of ownership of a company to investors. Investors can make profits from their appreciation in value and from dividend income over the time. Through shares, companies collect funds from investors for their business, and in return, they offer equity to shareholders.
Shares are traded regularly among investors on the stock market, which is why their price fluctuates daily. Thus, you need to invest for the long term to avoid the associated risks.
- Exchange Traded Funds (ETFs)
Exchange Traded Funds (ETFs) are a hybrid investment option with features of stocks and mutual funds combined. These instruments are funds with a diversified holding managed by fund managers, which are traded like stocks in units.
Short Term vs Long Term Investments
Short-term and long-term investments differ in features, objectives and outcomes. Based on these points, some differences between the two types of investments are given below.
Short-term investments aim to invest funds in less volatile options with easy access to withdrawal. On the other hand, in long-term investments, the primary objective is to earn high returns over time.
Long-term investments offer high returns if you invest for a long time, whereas short-term investments provide moderate to low returns with few exceptions depending on investment strategy.
In short-term investments, all investments usually have a maturity period between 1-3 years. Long-term investments have a minimum tenure of 5 years but can stretch for 15-20 years.
Short-term and long-term investments should be important parts of your financial strategy. They can be an advantage or disadvantage to your portfolio based on your investment instrument, market behaviour, investment goals, etc.
Technically you cannot compare both investments as both can give you the desired outcome based on your needs. However, it is important to understand which investment will be suitable for what needs and which will maximise your returns or minimise risks.
Frequently Asked Questions
What is the safest type of investment?
Investment instruments that offer fixed returns are considered the safest. Fixed Deposits,, government securities, NSC, etc., are examples of such investments.
Is it smart to invest in the short term?
If you are an investor with a high-risk appetite and want high returns, then there are better options than investing mostly in short-term investments. However, if you want quick access to your money and want low risks, it is smart to opt for short-term investment.
Which is the safest long-term investment option?
Real estate is one of the safest long-term investment options as it has comparatively lower risk than equity investments. However, all options can give high returns if your strategy is organised.
Are all short-term investments tax-free?
No, all short-term investments are not tax-free. However, several short-term investment options offer tax benefits and reductions based on investment type and capital.