Long-term investment vs. short-term investment

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Long-term investment vs. short-term investment

Wednesday, 03 July 2024 | Agencies

Long-term investment vs. short-term investment

Are you considering where to put your hard-earned money? Are you split between making long-term or short-term investments? Understanding these two types of investments is critical because this decision allows you to choose the best investment plans and optimise your results.
Long-term investments are often kept for several years or even decades, allowing individuals to accumulate wealth over time. On the other hand, short-term investments are kept for a shorter duration of time, often up to three years, and are frequently utilised to address immediate financial needs or capitalise on short-term market opportunities.

What are long-term investments?

Long-term investments are those investments which are generally held for a period of over three years. They are more commonly used by those who seek high returns over a long period and who can handle fluctuations in the market. The main factor behind long-term investment is compounding where your wealth increases at a faster rate.

Types of long-term investment 

1) ULIPs (unit-linked insurance plans)

ULIPs are hybrid products that combine the features of insurance and investment. These can offer both risk cover and accumulation of wealth. Investors can opt for various types of funds, including equity, debt, or hybrid, depending on their risk appetite and investment objectives. In ULIPs, part of the premium is used for insurance while the other portion is invested in the selected funds for investment purposes.

2) PPF (public provident fund)

PPF is a long-term investment plan that is completely backed by the government because it offers high interest rates along with tax exemptions under Section 80C of the Income Tax Act. Being one of the safest investments in India, PPF has a maturity period of 15 years and is ideal for those who are in the process of building their wealth.

NPS (national pension scheme)

NPS is an optional pension scheme which is designed to offer periodic income after retirement. There are two types of accounts namely Tier I and Tier II accounts, which have different withdrawal and tax privileges. The investment in NPS can be spread across equity, corporate bonds, and government securities, offering a diversified portfolio.

3) Guaranteed savings plan

A guaranteed savings plan is an insurance product that provides both insurance and guaranteed savings benefits. It is meant to cater for the long-term financial needs of an individual while at the same time protecting their family in the event of misfortune.

Schemes like HDFC Life Click 2 Achieve provide assured benefits and life insurance. This plan not only provides for your family’s needs in your absence but also caters for other long-term financial needs such as purchasing a home or saving for your child’s higher education. Here, you can select the premium payment term, policy term, and frequency of premium payment.

Now, let’s take a closer look at the characteristics of the HDFC Life Click 2 Achieve plan –

  • This plan offers guaranteed returns, making it a safe bet for investors. Here are some of its striking features
  • This plan offers flexibility in payment terms, life cover and survival benefits – one can design the plan to suit one's needs.
  • This plan provides for an annual raise of up to 10%, thus guaranteeing that your profits will grow in parallel with your requirements.
  • There is an option of ‘monthly payout mode’ that allows you to receive a constant income to cater for your monthly expenses.
  • The plan offers up to 200% return on premium, which means that the return on investment is high.

 

In HDFC Life Click 2 Achieve not only your financial security is ensured but also your dreams are fulfilled with assured returns.

4) Senior citizen savings scheme

This is an investment plan sponsored by the government for those citizens who are 60 years and above. It offers a fixed income with the highest safety and tax advantages.

5) Annuity plans

Annuity plans are financial products that offer a fixed income stream during the post-working years. When an individual buys an annuity plan the insurance company promises to pay a certain sum of money every year for life or a specified number of years.

What are short-term investments?

Short-term investment is often less risky than long-term investments, but they provide lesser returns. They are perfect for individuals who want to achieve short-term financial goals or take advantage of transient market opportunities.

Types of short-term investment

1) Stocks

Investing in stocks might be considered a short-term investment if the intention is to sell them within one year. However, stock market investments are inherently volatile and involve greater risk.

2) Equity mutual funds

These funds invest in equities and are ideal for investors seeking reasonably large returns for a span of up to three years. 

3) Fixed deposits

Fixed deposits with terms of less than a year might be called short-term investments. They have a set interest rate and are deemed safe.

4)  Arbitrage funds

These funds seek to capitalise on price differentials in several markets while providing generally consistent returns over a short period of time.

Difference between long-term and short-term investment

Long term investment

Short term investment

High returns over extended periods usually five years and above

Swift returns for periods spanning up to three years

Risk is usually higher owing to market fluctuation

Lower risks than long-term investment

The goal of this investment is to build wealth over time

The goal of this investment is to mitigate immediate financial needs

Generally, is less liquid, with penalties for premature withdrawals

More liquid and can be accessed easily

A long-term investment strategy requires a more strategic and disciplined approach, focusing on market trends and long-term financial goals.

Short-term investments might involve more frequent trading and monitoring of markets for short-term gains.

 

Ending note

Long-term and short-term investments are both key components of a well-diversified investment portfolio. Long-term investments have the potential to provide better returns over time, whilst short-term investments provide liquidity and flexibility. Understanding these distinctions might assist individuals in making informed selections depending on their financial objectives and risk tolerance.

 

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