Short-term Or Long-term Investment Plans - Which One Works Best For Me?

By Author: Shashank Pawar
Total Articles: 53
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“Short-term mutual funds can be an excellent tool for saving money.”

“You need to be patient when you invest in mutual funds. They require time to produce results.”

People who want to invest in mutual funds often get confused by the above two statements, which directly contradict each other.

The point is, regardless of whether you are aggressive or conservative, have low or high amounts of money to invest, or have a long-term or short-term financial goal, the wide variety of investment opportunities in the mutual fund bucket offers something to every investor.

According to your risk appetite, time horizon, and investment volume, you can use a range of mutual fund schemes to meet both short-term and long-term monetary targets.

Let’s review the best short term and long term investment options that you can leverage to your advantage.

Basic Differences Between Short-Term and Long-Term Mutual Fund Investments

Financial gurus believe that short-term mutual fund investments are those that investors seek to liquidate within three years, while, according to most experts, investments kept for over five years are long-term.

Empirical evidence shows that investors benefit when they stay invested in mutual funds over a longer-term, as they usually gain from the compounding of funds. However, with a multitude of offerings available these days, investors are also willing to take advantage of short term investment plans.

It is important to remember that the selection of funds plays a decisive role in making successful mutual fund investments, especially in the short term.

Mutual Funds for Short Term Investments

For short term mutual fund investments ranging from one month to one year, debt funds and liquid funds are top choices. Both can produce returns higher than a savings account, which provides around 4% interest.

Since certain bonds in a debt fund portfolio can generate a higher yield than orthodox savings options, short term investments can sometimes deliver greater returns than a bank fixed deposit as well.

However, be it short-term or long-term, keep in mind that mutual fund investments cannot guarantee a fixed rate of return, as mutual funds are subject to market risks.

Long Term Mutual Fund Investment

If you are planning for retirement or looking at a time horizon of five years or more, the best long term investments will be in equity mutual funds, for instance, diversified equities funds or large-cap funds. 

The benefits of long-term mutual fund investments are twofold. First, you get tax benefits, as investments held over one year are eligible for tax exemptions. Second, you get significant advantages of compounding, which facilitates capital appreciation.

It is worth mentioning that the rate of returns in equity mutual funds can vary. In some years, you can see an annual return on investments as high as 20%, whereas annualized returns in certain years can drop below fixed deposit rates.

Overall, historical data shows that investors get lucrative returns when they go for long-term mutual fund investments.

Mutual fund investments offer great flexibility, as you have the liberty to design your portfolio with both short-term and long-term funds, depending on your financial goals. This paves the way for solid investments that provide earning opportunities higher than most investment options.