What are Long term investments & Short term Investments?
Before we start on this topic, let us explain what short-term investments are and what long-term investment is because many investors don’t really understand this concept and to many, even 1 year seems to be long-term! The short-term investment is anywhere 1 year to 3 years. Period less than 1 year would come under Ultra Short Term. The investment horizon of more than 5 years should ideally fall under Long Term investments. Now a period between 3 to 5 years is a combination of long-term and short-term and we would classify as Medium Term Investments.
We will try to understand it by analogy
Just imagine a situation where you have to go to a nearby grocery shop. Would you take an Airplane for this purpose? Sound funny! Let us change the example, you have to go to Canada for a vacation. Would you go walking or take cycle for this purpose. Sound irritating!
Must Read – “Timing” or “Time in” Equity Markets
What we want to convey is that you should choose your INVESTMENT VEHICLE depending on how far you have to reach. We use high-speed vehicles only when our target is far away; similarly, high return investments like equity should be used only for long-term goals. On the contrary, for a short distance, we use vehicles with slow speed and the same thing applies in investment. For short goals, we need to use low vehicles like Debt.
Ownership VS lending in investments
When we plan for long-term investment, the speed on the return on investment should be high. Not just because you have to make more money but you have to beat inflation in long run. You have to make sure that the returns on investments are greater than the rate of inflation. This can happen only when you invest your money in Ownership Assets. Ownership assets have short fluctuations but in the long haul, they beat inflation and create wealth. Long-term Financial investment which beat inflation is Equity and it is equity which creates wealth in long term. When we talk of equity, we would like to clarify that we don’t advocate people to invest in equity directly unless they have in-depth knowledge of markets. For people who are not specialists, it is better we leave to professionals and invest in Equity Mutual Funds.
When we want to plan for short-term investments, the need is to preserve the wealth and not to create the wealth. Do understand the difference between income and wealth. Since the tenure is short, one cannot take any risk of fluctuation, and hence we should be in lending assets. Lending assets in financial terms is called Debt. Debt is an instrument where gets returns in the form of interest. Typically, people relate the word interest with FDs, Post Office schemes, etc. but there is a much larger universe of debt. In fact, from the point of view of Income Tax, it is better than returns are taken in the form of dividends and capital gains rather than simple interest. The option available in Debt instruments are huge but typically investor has limited knowledge of it. Debt instruments are FDs, Bonds, debt-based Mutual Fund schemes such as Short Funds, Gilt Funds, Liquid Funds, floater, etc. Depending upon the liquidity needs and taxation, the product should be taken debt category. Read FD VS FMP
As legendary investor Warren Buffett quoted “Investor has to do very little things right as long as he avoids Big Mistakes.”
Investors make the mistake of choosing the wrong vehicle for their investment. Practically, Equity should be for the Long term and Debt for the short term, but investors do the opposite, Equity for the short term and debt for the long.
Guess which is the world’s most expensive hobby…… “Equity Trading”
Think of your own portfolio and analyze it.
Love to hear your comments.