There are many investments options to choose from, however investment options can be classified under two broad heads: short-term investments and long-term investments. To decide between the two types of long term investments, you need to begin by knowing the difference between these two and the purpose they are designed to fulfil. Let’s dig deeper to find out the essential differences between short- and long-term investment options.
The first and foremost difference between short term and long term investments is with regards to the timeframe that they are held for. Short-term investments are typically held for less than 12 months. Long-term investments, as the name implies, can be held for several years, typically, 10 years or more.
Risk and return expectations
All financial instruments carry some element of risk and the ability to provide returns. The difference between short-term and long-term investments can also be determined in terms of risk and return expectations. For instance, equity investments are short term investments with high returns that can be held for a short but can be subject to a high rate of fluctuation.
However, if you have different expectations of your investments and are essentially investing for principal protection, a short-term investment in a debt-oriented instrument will suit your purpose just fine.
Expectations can be radically different when you are investing for the long term. In such a case, you do expect higher returns along with capital appreciation and minimum risks. Investing in equity in the long-term can be considered a relatively risk averse strategy. This is because over the long-term, the impact of volatility is lessened considerably. Additionally, equity as an asset class provides the best inflation-adjusted returns over the long term. Those with a medium- to high-risk profile can thus consider equity investments to build a decent corpus for retirement.
In conclusion, it may be fair to say that as an investor it is likely that you will need to invest in a mix of both long- and short-term investments to meet different financial goals. A good idea about the essential difference between the two will help you make a prudent choice. When it comes to creating an investment strategy, it is crucial to find the exact balance based on your individual circumstances. Prior to beginning an investment plan of action, whether short or long-term investing, you may want to list down a set of clear goals for investing.
Even though short-term investments may appear to be a better option, because it offers better liquidity, you may want to lay aside a component of your money to invest for the long term. This is because long-term investments have better protection ability if you were to fall back on some of your money due to an unexpected fall or a bad investment. One crucial tool towards building wealth is to invest without worrying about the future or avoiding it.
To help you understand your financial foals clearly and risk tolerance, you may want to consider using a financial advisor. An advisor can guide you in building an investment portfolio that focuses on your goals. You can receive the best course of action for your investments based on your financial goals as the financial advisor can help you determine the amount of growth and money you would require in a specific period.
Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
IntroductionNew Year is around the corner. While you might be busy changing calendars, have you thought about having a financial calendar? Every year has a calendar which shows the months, days and dates and you plan your affairs around that calendar. What about a financial calendar? Do you plan your finances around one?Many of you might not have heard about a financial calendar. A financial calendar is one which is useful for your financial planning. It guides you on how to save and spend your income in different weeks of the month. If you create your calendar and follow it, you could utilize your income in the best possible way, both in terms of meeting your expenses and creating investments. Do you have any idea on making a financial calendar?Making a financial calendar is simple. You just have to plan your finances around key financial events at the right time. Let’s see how– Month-wise calendarFollowing is a quarter-wise financial calendar for your financial planning - • April to June – In the new financial year, it is time to take stock of your investments and plan for new ones. First, invest in insurance plans. Besides creating an emergency fund you can also save tax on your next tax return. If you have loans continue servicing them. Also, figure your tentative taxable income and plan for tax-saving investments. • July to September – Continue with your investments. If you plan on taking a vacation in the next quarter you should start saving for it. This would ensure that your vacation does not eat into your budget as you would be prepared. • October to December – This is the quarter which is filled with festivities. Festivities entail new purchases and gifts. You should create funds for any big-ticket purchases which you intend to make in Diwali or New Year. Also, a fund is required for New Year celebrations. Towards the end of the year you should start planning for investing in tax-saving instruments. • January to March – This is the first quarter of the New Year and the last quarter of the financial year. Tax planning takes centre-stage in this quarter. Analyse your income earned in the last nine months and also forecast the income for the quarter. Invest in Section 80C instruments to save tax on up to Rs.2 lakh of your income. Buy health insurance plans if you haven’t bought one and save tax under Section 80D. (To know more tax-saving options, click here)Planning for each monthAfter you have planned for the different quarters, you can plan for each week of a month in the following way - • First week of the monthFollow the Warren Buffet principle - Save first, spend later. As soon as you get your income, invest at least 30% of it in different avenues. Of this investment, 10% should be put aside in an emergency fund. After having saved, meet the urgent expenses. Pay off your household expenses and set aside lump sum money for daily lifestyle expenses. • Second week of the monthOnce you have met your household expenses, the next 30% of your income should be used for paying off your debts. Pay the EMIs scheduled and make sure there is no default. Your child’s education fees should also be met in this week.• Third week of the monthPay your bills for credit card, mobile and other utility bills. If you plan on making big-ticket purchases, schedule it for the last week and make provisions for them.• Fourth week of the monthAssess the remaining income in your hand. If all your goals are invested in, try and prepay your loans. If you are thinking of making a big purchase in the coming months, create a fund for the purchase. Points to keep in mind Big budget purchases should be planned in advance Tax saving should be done in regular investments throughout the year. Don’t plan your taxes only in March. When investing, choose tax-saving instruments and your tax planning would be taken care of. Plan for vacations and unforeseen bigger expenses too (like gifting, buying a luxury, etc.) Automate your savings through ECS facility Factor in inflation in your budgetary planning ConclusionCreate a financial calendar and you would know how to utilize your income in the best possible way. Don’t ignore tax planning though. Your investments should be in tax-saving avenues which reduce your taxable income. So, use the above-mentioned knowledge and plan your calendar. DisclaimerInvestment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Investing money in different avenues can be a good way to earn higher returns in the future. By now, we know that investing is a good habit. But investing towards specific goals is a better habit. This way, you can concentrate on achieving real financial goals in your life within a certain time period. But what if you have too many goals? How do you achieve all of them?Let’s take Abhinav’s example. Abhinav has been working in an IT company for the past one year. He has just started investing his money. Right now, he has multiple financial goals for the near future. Here is his list of goals: Abhinav earns around Rs 45,000 per month. With his income, it is not possible to meet all his goals at the same time. Instead, it is always better to prioritize goals. In other words, some goals are more important than the others (at least for the short-term). By identifying the most crucial goals, it becomes easier to achieve all the goals at the right time.1) Create a listThe first step is to create a list of all the financial goals you have. This exercise helps you understand what you would like to achieve in the next six months, two years or even ten years. Remember to be as specific as possible when writing down the goals. This will help you arrive at a clear financial estimate for the goal. 2) Rank them in order of importance and urgencyOnce you have identified your goals, it is a good idea to rank them in order of importance. For instance, Abhinav may want to buy a sports car. But is the goal really that important currently? Paying off the college debt may perhaps be the most important financial goal at the moment. It is always better to clear off existing debts. There is no point in chasing lower investment returns (6-8%) when debt (20%) is much higher. It might be better to postpone a less important goal for a later date when the financial conditions get better. 3) Invest to achieve these goalsAfter identifying the short-, medium- and long-term goals, Abhinav can start investing to achieve them. For instance, creating a retirement fund is an important long-term goal that should not be ignored. Abhinav can start investing small amounts regularly in an equity fund through a Systematic Investment Plan (SIP) for this goal. Similarly, he can divide up his funds to invest in different avenues based on his requirements. 4) Reassess the list after a few yearsOnce he achieves a goal, he can tick it off the list. Every small progress is important. However, it is necessary to review the list once in a while. As people grow older, their goals and ambitions change. As a result, Abhinav needs to adjust his goals whenever necessary and invest accordingly.ConclusionGoals are an important aspect of human life. But not all goals are equal. As a result, it is necessary to prioritize them and work actively towards achieving them at the right time in life. This way, it is possible to lead a happy and fulfilled life (at least where the finances are concerned).What next?Most people have the habit of saving money. This is certainly a good thing. But guess what? In the current day, saving money is not enough. You need to do much more in order to beat inflation and achieve your goals. DisclaimerInvestment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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