Everyone likes a great bargain, but you do not always gain profit from what looked like a good deal. You figure out much later that you did not use what you bought. Investing, like most other endeavors in life, should be predominantly based on our needs. Investment decisions usually involve dedication and objectivity, without which it’s hard to remain calm when market conditions fluctuate rapidly.
Depending on the holding period, investments are classified as short-term and long-term investments. While some investors look forward to earn good returns over the long term, others want security and quick returns. If you are new to investing money, you must understand the difference between these two investment methods beforehand.
Below, we have briefly explained how each type of investment plan can help you with your wealth creation needs:
Short-term investment plan
An investment that has a time limit not exceeding three years is considered a short-term investment. Fixed Deposits in banks, mutual funds, short term bonds, and money market funds are the most common examples of short-term investments plans.
Fixed deposits by the bank: The duration of fixed deposits can vary between 14 days and ten years. Such deposits can be recycled after ripening. Liquidity can be a concern here as individual banks do not allow early withdrawals.
FD Interest is taxable at the rate of your income slab together with the applicable surcharge/process. If the interest level for the current financial year crosses Rs 10,000 for AY 2019-20, the TDS on FD (Fixed Deposit) is 10 per cent.
- Fixed deposits of the company: They can hold more than one year.
- Post Office Time Deposits: These tenures range from one to five years.
- Recurring deposits: You may open an RD for a period of as low as six months.
- Sweep-in-fixed deposits: These offer comparatively higher returns, with a minimum tenure of around 12 months, compared to low returns on savings accounts.
- Large-cap mutual funds: These funds invest your money in large-capitalized companies. These funds deliver stable returns after investment over a short period of one and three years. They are low-risk instruments since the investments are made in big, well-established businesses.
Long-term investment plan
Generally, a long-term investment plan reflects savings that are expected to cover costs for significant life events, such as owning a second home, schooling for children, and marriage or retirement. Investing in these plans gives a higher chance of raising returns over a 10-year term or longer. Also, they are usually illiquid but provide a high return rate.
- Stocks- Stocks represent the physical representation of a part of the value of a company. A corporation gives its founders Initial Public Offering (IPO) to raise funds for their companies. The company’s shares are exchanged in stock exchanges after the IPO to offer market-leading returns, which makes them eligible to be a part of the best investment plan you choose.
- Equity Mutual Funds- It can also form a part of a long-term investment plan to receive good returns. To achieve more significant financial objectives, you can invest in small and mid-cap equity mutual funds over the long term.
Difference between a short-term and long-term investment plan
Any investment plan is prone to some risk. Long-term investment, though, entails more risks and is therefore unpredictable. Regular market volatility may erode the long-term valuation of the investment.
On the other hand, short-term investment plans have drawbacks of inflation and purchasing power. High inflation rates will make inadequate returns on a short-term investment.
Long-term investments are made with the aim of wealth creation for life instances like your children’s wedding or retirement. On the other hand, short-term investment plans are primarily to fulfil short-term plans such as purchasing a two-wheeler vehicle or a car.
If you opt for long-term investing, then it would mean that you are searching for better returns on investment in the long run. Short term investment goals are very different. You follow them to get returns that can be used for day-to-day expenses. If you are risk-averse, you can think of short-term investment as one of the best investment plans that typically guarantee a relatively higher level of protection for the principal amount.
Which investment plan should you choose?
It is often best to strike a delicate balance between short term and long-term investment plans. As an investor, you should wisely allocate specific funds for long-term investment to create wealth while also following a comfortable lifestyle. Long-term returns also help you survive unexpected crashes in the economy. Alongside, plan to invest in short-term investment plans to get higher returns on your capital than just saving them aside.
Diversifying investments, i.e. buying stocks, bonds etc. from different market sectors, is essential. It makes a well-balanced investment portfolio of risky and less risky investment options. Another significant factor is the age when it comes to choosing between the two. If you are a young investor, then you should select riskier and long-term investment plans. However, if you are an older investor, then you would like to minimize the risks and select short-term investment plans. Long- and short-term investment plans from reputable insurers such as Max Life Insurance will help you diversify your investment portfolio. Make sure your investment decisions are need-based to prevent any financial burden alongside.