Short Term vs Long Term Investment - Which Should I Choose?

Short term investment and long term investments are both important in their own way as each of these serves a different purpose and helps an investor in different ways.

Depending on a lot of factors like your financial goal, your risk bearing appetite and your expectations from your invested amount, you can either invest solely in long term investments or in short term investments or in both types of investments partly to meet separate investment goals.

The next steps comes of choosing the right investment instrument, for which there are both secure and unsecure types of investments, which will decide the exact avenue for your investments. Let us first understand what short term and long term investments mean.

Table Of Content

Short Term vs Long Term Investment - Which Should I Choose?

1. What are Short Term Investments?
2. What are Long Term Investments?
3. Considering Financial Goals While Deciding Your Investment Plan
4. Risk Involvedin Both Types of Investments
5. Your Risk Taking Capacity
6. Your ExpectationFrom The Invested Amount

1. What are Short Term Investments?

Short term investments are essentially investments in securities which mature and give their expected returns within a period of three years. These investments are done to earn interest or return on investment of some percent, without actually expecting the investment amount to grow multifold. While there is no exact definition of ‘short term’ or ‘long term’, but essentially investments made for more than five years fall under the category of long term investments.

2. What are Long Term Investments?

Long term investments are those which are done with a more distant financial goal n mind. The idea is to grow wealth over a long period of time, ignoring the fluctuations in the markets caused over a shorter period.

3. Considering Financial Goals While Deciding Your Investment Plan

Long term and short term investments vary greatly in term of the goals they achieve. While short term investments focus more on near future goals, long term investments are done with an aim to collect money for requirements in the distant future. For example saving money to pay for a house loan’s down payment can be a short tem goal, whereas planning to buy a house in a metro city without taking a loan can be considered to be a long term financial goal due to the rising costs of real estate

4. Risk Involvedin Both Types of Investments

In case of short term investments market conditions and the socio economic situation of the country and the financial system plays an extremely important role and can affect the return you earn through your investments. However, when it comes to long term investments, it is inflation which plays a major role since if the returns promised through the investments are not higher than the expected rate of inflation, then the investments will be of no use, because the worth of the amount invested and returns earned would be much lesser than the value of the amount after a long period of time.

5. Your Risk Taking Capacity

Irrespective of whether your financial goals require a long term investment or a short term one, your ability to bear risk can be a game changer leaving you with limited options for investments in both horizons. When it comes to short term investment options, there are both high risk investment options like stock markets and money market funds as well as low risk ones such ad fixed deposits. Similarly for long term investments, the high risk bearing investment options are stock market investments, venture capital, alternate investment funds, real estate etc., whereas lower risk investment options are government bonds and schemes in which sovereign guarantee is offered by the government

6. Your ExpectationFrom The Invested Amount

When it comes to short term investments, the expectations are not as high, since investments and the interest generated does not compound over time. There is a fixed or variable interest which is applicable on the investment and the interest generated or the profit earned is rarely multifold of the original investment amount. On the other hand, if done properly, long term investment can be expected to give returns which are multiple times of the invested amount. This is possible through the power of compounding. Many investment advisors recommend investing money in such instruments where compounding occurs, for more than 15-20 years as within this time, the interest earned is reinvested to earn more interest, taking the total profits generated much more than the principal amount invested in the investment instrument. Hence, this helps in generating wealth, which is what people expect from long term investments.

Final Thoughts

If you are confused about which type of investment method is best suited for you, then you should probably take help of a financial advisor or planner to help you in planning your investments. The investment corpus and returns generated also depends greatly on the amount you are ready to invest. It is always said the earlier you start, more chances you have to generating handsome returns over time, and for the money to work for you.

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