Short Term Investments
A short term investment is also known as a temporary investment or marketable security. It is one where money is invested for a shorter period in order to meet the short term objectives. It is also a kind of debt or equity security that is expected to be sold or converted into cash in a particular duration like in the next 3 to 12 months. In other words, it is a stock or bond that the management holds to earn a quick return and plans in order to sell in the current accounting period. It is a part of the account in the current assets section of a company’s balance sheet. It contains any investment that a company has made that is expected to be converted into cash within one year.
So, Short term investments are any assets that are anticipated to expire or to be liquidated within a particular duration of 1 to 3 years. Its goal is to protect capital with low-risk investments.
Objectives of Short Term Investments
In general, a short term investment is the one where the money is invested for a shorter period duration which ranges from few days to a maximum of 3 years. However, sometimes there might be some opinions in which a period is extend up to 5 years and is termed as short term.
Short term investments are usually done with smaller amounts of money to yield constant or variable returns but not too high returns.
The objectives of short term investment include the following:
- A family vacation in India or abroad after a year.
- Buying a favorite car after 2 years.
- Buying a gold necklace or diamond ring for your wife.
- Purchasing new furniture for the house.
- Renovation of the house.
Short term goals are the ones which the person wishes to achieve in a shorter duration. Short term investment plans gives us more flexibility to withdraw funds in a shorter period. Also, it should be easier for anyone to convert their funds into cash as and when required. So, short term investment plans help us to achieve our short term goals in an effective way, and also there is an easy facility to convert our investments into cash.
Types of Short Term Investments
The common types of short term investments include:
Saving accounts are least profitable type in terms of short term investments. They are the most simple and liquid types of short term investments. But, after investing money, they yields low returns. Many savings accounts do not keep up with inflation, so they are more beneficial for the people to store money over long duration of time.
Certificates of Deposit
Certificates of Deposit (CD) are the most common types of short term investments. When we keep our money into a CD, then we agreed not to withdraw the money for a specific period of time, in order yield higher returns. CDs length range from as little as of three months to as long as of five years. CDs are federally insured, thus are treated as one of the safest types of short term investments. They still offer to give higher returns.
Money Market Funds
They are typically liquid like savings accounts, but they ensure us to provide better returns. They are not federally insured like the other types of short term investments. This results in making money market funds as a higher-risk vehicle for short term savings.
Treasury Bills and Bonds
They are those that provide flexible short term investment terms of about four weeks to one year. Treasury bills are especially designed for short term savings and offer extremely low returns.
Bonds offer more flexibility, but they are not much secure for short term savings than treasury bills.
Best short term investment options in India
- Savings Bank Account
- Short Term Fixed Deposits (FDs)
- Short Term Mutual Funds
- Liquid Funds
- Fixed Maturity Plans
- Equity Linked Saving Scheme (ELSS)
- Arbitrage Funds
Benefits of Short Term Investments
- A short term investment strategy is done within a well-diversified and long term investment plan which is the key to dealing with your financial needs.
- Short term means anything from several months to several years. So, investors use a general rule of three years and considered as a short term investment.
- Short term investments allow us to make money in a small period of time but with the fewer amounts of risk and penalties.
- Short term investments can be easily turned into cash or rolled over into other short term based or long term based investments.
- They offer a way of increasing the profit on assets that we need to remain more liquid as a hedge (contract).
Long Term Investments – Introduction
A long term investment is a type of investment that refers to hold an asset for an extended period of time. It is one where money is invested for a fairly long period of time. Depending upon the type of security, a long term asset can be held for more than 1 year or 30 years or more. Here, the investment is spread over longer tenure to meet our long term financial goals.
So, Long term investments are investments which are invested for a very large duration of time. This duration is more 1 year and goes up to 30 years and more. Their purpose is to take investment that matures more than 10 years or above.
So, an investment done for a period of more than 3 years, in many cases 5 years is generally considered as a long term investment. Some long term period goes beyond 10 years as well.
Objectives of Long Term Investments
In general, a long term investment is the one where the money is invested for a larger period of time that will be more than 10 years or above. However, there might be opinions which made the investment of 30 years termed as long term.
Long term investments are usually done to meet our long term financial objectives and future expenses like:
- Education-based purposes
- Marriage-based purposes
- Purchasing a new home
- Setting a retirement corpus
Long term investments provide us money to be invested for a longer period gives a sense of personal security and also yield higher returns.
The main objectives of long term investments are:
- Making yourself financially free
- Building a good corpus, a collection of written texts
- Benefit from the power of compounding
- Money invested for longer period tends to generate good and higher returns
Types of Long Term Investments
The following types of long term investments include:
They are the equities. When we own any stock, then it means we own a piece of the company. On the long term basis, we are expected to earn an annual rate of 7-8% of returns from the stocks. This is very beneficial for building long term wealth.
Most investors having their stocks allow their emotions to take decisions instantly for them and end up by buying and selling of stocks frequently. It is not ideally correct because stocks are not for the long term basis. After frequent trading, the investors are turning them into a short term basis. When this is happen, then there are large chances of losing money or getting a below average returns.
- Mutual Funds or ETFs
Mutual funds or the Exchange traded funds are the baskets of stocks or bonds, or a combination of both. The reason to invest in them as opposed to stocks is two-fold.
- It is much cost effective as a purchaser to own a mutual fund or ETF.
- We are instantly diversified.
We can invest very little money and at the same time removes some of the risks that come from investing too heavily in a company. Most of the average investors invest money in mutual funds or ETFs.
- Municipal Bonds
Municipal bonds runs anywhere in the world and its range of duration is 10 years to 30 years. Due to this, they can make long term investments. They are not ideal as short term investment because of their long durations.
- Treasury Bonds
Treasury bonds are the US government bonds that are issued by the US government. Because of the odds of the US government which defaults its bonds to low, the interests earned from these bonds are also low.
- Inflation Protected Securities (TIPs)
An Inflation Protected Security (TIP) is also type of bond. So, instead of paying a set of interest, we can easily earn an additional amount of interest adjustment based on inflation. Every 6 months, an inflation adjustment is made based on inflation.
- Savings Bonds
Savings bonds are also long term bonds. They are used to provide by grandparents to grandchildren at Christmas. However, nowadays, these bonds are not common. The term for the savings bonds is 30 years. But, it can be redeem them before the 30 years is up.
- Alternative Investments
They are the investments outside of stocks, bonds and even real estate. They typically include oil, gas and precious metals. They can be volatile over time.
- Real Estate
Real estate is another type of long term investments for two reasons. First, the mortgage you have taken on real estate is usually of 15 or 30 years in length.
Second, selling a house is not easy task and is not very liquid. It means we need some money so we simply list our house and have cash in a day or so. It takes an amount of time to sell a house.
Best Long Term Investment options in India
- Public Provident Fund (PPF)
- Gold Investments
- Mutual Funds
- Real Estate
- Long Term Bonds
- National Pension Scheme (NPS)
- Post Office Saving Scheme (POSS)
Benefits of Long Term Investments
- Long term investors should seek a large brief out of the companies that have a proven track record of continuing stability and growth. While new companies are also a good option for long term growth, so there is a less risk involved when a business already has a proven track record.
- In long term investment, companies have stocks paying dividends, especially one that increases dividends on a regular basis. These companies have proven their commitment to share dividends and typically will continue to pay back their shareholders every quarter as they always have.
- Many investors get benefit from the relative stability that the long term investment offers.
- Long term investing also saves us from other expenses like transaction costs from active trading.
- Putting your money in long-term investments also provide tax advantages on capital gains. Long term gains are taxed at rates below your income tax bracket.
Comparison of Short Term and Long Term Investments
Some investors wish to invest for short term gains and some wish to invest in long term gains.
Short term investing generally refers to hold any particular investment for a small duration like for a year. So, many investors take this scheme, basically day traders who want to hold investment for less than one day, since opening positions each morning and closing them before the market shuts down for the day.
Long term investing is preferred by those who want to hold shares for weeks, months or even for a year.
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