Which is Better Long Term or Short Term Investment?

When individuals intend to earn a lump sum of money by investing for a short period, they may choose short-term investment options like a certificate of deposit (CD), capital note, etc. On the contrary, long-term investments aim to generate a substantial amount for the future, wherein money remains locked for several years. Apart from this, both short-term and long-term investments have some other differences. Keep reading to get a crystal-clear idea about long-term investment vs. short-term investment.

Long-term investments are those investments that are kept for a year or even longer. These investment plans provide higher returns as they are locked in for a longer tenure. Individuals can plan long-term investments according to their goals, present income, and estimated investment returns.

For instance, if you are 25 and saving funds for retirement, you have nearly 35 more years to build wealth over time. Long-term investments are mainly made to fulfil various future commitments like child education expenses, post-retirement goals, etc.

Financial investments, also called temporary investments or marketable securities, are short-term investments. These types of investments usually come with a five-year maturity period, after which you can easily convert them into cash.

Furthermore, short-term investments come with a premature withdrawal facility and are quite convenient, especially when you have a financial crunch and need a substantial amount of money within a shorter period.

Based on the type of instrument individuals invest in, long-term investments are classified into various kinds, as stated below:

Life Insurance

Life insurance is noteworthy among the most popular long-term investments, which you can opt for to ensure the future financial security of your family members and loved ones. When you have a life insurance policy, your beneficiaries will get the assured sum from the insurance company if you are no more in the world. This way, your dependents can lead their everyday life without any financial distress in your absence.

Stocks

Stock signifies fractional ownership of equity in a company. They are considered among the small-to-high-risk long-term investment options since there is no guarantee whether you will earn substantial or poor returns. This is because the outcome of a stock depends entirely on the performance of the respective organisation.

Bonds

Bonds are a type of security that guarantees regular payment of interest. When you buy this investment option, you let the bond issuer borrow your fund and repay you with interest. Bonds are usually less risky than other investment choices, such as stocks. However, due to this reason, it generates lower returns than stock.

Cash Equivalent

Cash equivalent investments are another long-term investment option comprising investment in high-interest savings accounts, certificates of deposit (CD), etc. Investors usually prefer this approach to others since they offer a steady rate of return. Even though the returns are low, these investments come with minor or no risks. Thus it is widely preferred by those planning for their post-retirement.

Real Estate

Real estate has been a thriving industry in India. It has excellent prospects in several sectors, such as commercial, hospitality, housing, manufacturing, retail, etc. Individuals with substantial money or who earned enough benefits from their previous investments can make long-term investments in real estate.

Short-term investments tend to provide ample returns in a fairly short period that can be redeemed within a few months or years. Some of the noteworthy types of short-term investments include:

Savings Accounts

Savings accounts are the safest and one of the most versatile short-term investment options. The main objective of a savings account is to generate high liquidity rather than focus too much on earning. It allows you to withdraw funds whenever and wherever you require. However, as it has an interest rate of around 4%, there are better investment paths than this one.

Money Market Account

Another popular type of short-term investment option is a money market account. Money market accounts are popular liquid funds that intend to serve an individual with the security of their capital, alongside providing good returns. It is considered an ideal short-term investment option with a maturity period of 90 days. Besides, it renders high liquidity alongside the least risk and has no lock-in period.

Recurring Deposits (RDs)

Recurring Deposits (RDs) are another prevalent and secured short-term investment option. It is ideal for those individuals who plan to make an investment monthly rather than investing in a lump sum. You may opt for either Bank RDs or Postal RDs. Generally, banks offer Recurring Deposits (RDs) for at least 6 months up to 10 years, while Postal RDs are fixed for 5 years. Apart from this, the amount of interest received on RD is taxable.

National Savings Certificate (NSC)

Another well-known short-term investment option is the National Savings Certificate (NSC), which is government-backed. This scheme is less risky than fixed deposits, mutual funds, or Public Provident Funds (PPFs). If you plan to invest in the NSC scheme, ensure that you maintain an account and invest at least ₹1000 each year. NSC also has a lock-in period of 5 years.

Fixed Maturity Plans (FMPs)

Fixed Maturity Plans (FMPs) are closed-ended debt-based mutual fund schemes with less liquidity and reduced interest rate risk than open-ended debt funds. The functioning of FMP is quite similar to FDs since it comes with a lock-in period of at least 3 years. Hence, it is an ideal investment option for those planning to lock their money over a fixed period.

Both short-term and long-term investments have their own merits and demerits. The short-term investment enables individuals to attain their financial commitments within a short tenure, with lesser risk. On the contrary, if you have the guts to bear greater risk and earn higher returns, you go for long-term investment vehicles. So, if you are curious about the better one out of these two options, it depends on your financial strength, future goal, and risk appetite.

In a nutshell, long-term investments are opted by individuals to fulfil their long-term needs and future commitments such as a child's education, wedding, house buying, retirement planning, etc. In comparison, short-term investments are made on special occasions when individuals desperately need money but face challenges due to cash crunch. Knowing about long-term investment vs short-term investment may help streamline your investing process.