Short Term Mutual Funds vs Long Term Mutual Funds (2024)

Short-term vs long-term mutual funds offer distinct benefits tailored to investors' varied financial goals and timelines. Short-term mutual funds typically encompass investments with durations ranging from a few months to a couple of years. These funds are ideal for investors seeking quick returns or those with immediate liquidity needs. They often involve lower risk profiles and may include assets like money market funds or short-duration bond funds.

On the other hand, long-term mutual funds cater to investors with a more extended investment horizon, typically spanning several years or even decades. These funds focus on wealth accumulation over time, offering higher growth potential but with a greater degree of market volatility. Long-term mutual funds commonly invest in equities, balanced funds, or diversified portfolios aiming to generate substantial returns over the long haul. Investors often choose between short-term and long-term mutual funds based on their financial objectives, risk tolerance, and investment timeframes.

Short term vs long-term investment in mutual funds

Here are some of the differences between short-term and long-term investments in mutual funds:

  • Interest rate
    Short-term funds are not as sensitive to interest rate movements as long-term mutual fund investments.
  • Returns
    Short-term investmentsgenerate higher returns compared to traditional investments like fixed deposits. Long-term investments in mutual funds generate even better returns along with the benefit of compounding.
  • Risk
    Short-term mutual fund investments have low risks compared to long-term investments.
  • Goals
    Short-term investments are more suitable for short-term goals like travelling and wedding ceremonies. In contrast, long-term investments are ideal for goals like retirement or children’s education.
  • Duration
    Short-term mutual fund investments are generally meant for tenure of up to 3 years. Long-term mutual fund investments require a minimum tenure of 5 years.

Long-term investment in mutual fund

When a person decides to remain invested in a mutual fund for a tenure exceeding 1 year, it is known as a long-term investment. Financial experts consider equity funds and hybrid schemes to be appropriate for such investments. Along-term investmentcan help tackle market volatility and create wealth for various long-term goals. Long term investment in mutual fund allows you to reinvest your earnings, dividends, or interest back into the investment, and increase the potential for growth exponentially.

On our platform we have around 12 different categories of equity and 7 categories of hybrid funds from the best AMCs in the country to choose from depending on your investment needs.

Benefits of long-term mutual funds

Long-term mutual funds offer several advantages for investors seeking to build wealth over time. These benefits include:

  1. Compounding: Long-term mutual funds harness the power of compounding, where returns are reinvested, leading to exponential growth of the investment over time.
  2. Lower transaction costs: Long-term funds typically have lower turnover ratios, resulting in fewer buying and selling activities. This minimises the expenses associated with frequent trading, ultimately benefiting the investor in the long run.
  3. Reduced tax liability: Holding investments for more than a year often qualifies for favourable tax treatment, potentially resulting in lower capital gains taxes compared to short-term funds.
  4. Opportunity to ride out market cycles: By holding investments for the long haul, investors have the opportunity to weather market volatility and benefit from overall market growth, thus potentially maximising returns over time.

How long to remain invested in mutual funds?

The answer to this will vary from one investor to another. Short-Term Capital Gains (STCG) taxation is applicable when one holds units of equity mutual funds for less than a year. Beyond 12 months, the returns are classified as long-term capital gains. One may want to stay invested longer to benefit from the lower LTCG tax rate. But many people wonder whether a long tenure of around 12 to 24 months is enough for earning adequate returns. It might be enough if the market is on the rise. Investors should note that they may not earn high returns consistently for long-term mutual fund investments. In bearish markets, one may experience long periods of losses.

Many financial experts believe that an investor’s time in the market should be if it takes for him/her to fulfil investment goals. The duration of your goal determines which mutual funds to invest in. Examples of short-term goals include temporarily parking funds or saving money for a vacation. Retirement plans and children’s education are examples of long-term goals.

You can also use the Bajaj Finance SIP calculator to understand the kind of returns a mutual fund will yield depending on its investment tenure.

Short Term Mutual Funds vs Long Term Mutual Funds (2024)

FAQs

Short Term Mutual Funds vs Long Term Mutual Funds? ›

Short-term mutual funds are good for people who don't want to take big risks with their money. Long-term mutual funds are better for people who are okay with taking a bit more risk and leaving their money invested for a longer time.

Are short-term mutual funds better than long-term? ›

Long term and short term investments in mutual funds serve a completely different set of investors. Short term funds are suitable for low-risk investors who do not want exposure to equities. While long term funds are best suited for investors who are willing to take some risk and staying invested for longer durations.

Which is better, long-term or short-term investment? ›

There are several risks that are involved with investments which is why the stock market has a 50:50 success rate. It is for this reason, that short-term equity investments are considered as risky, whereas long-term investments are considered much more profitable and consistent in terms of returns.

What is the difference between short and long funds? ›

Essentially, they take long positions in stocks they expect to increase in value and short positions in stocks they think are headed lower. These funds often use investing techniques—leverage, derivatives, short positions, and more—first used by hedge funds and then taken up by mutual funds and ETFs later.

How do you compare two or more mutual funds? ›

Comparing Mutual Funds: Different Parameters Available
  • Returns. This is by far the most common criteria used to compare mutual fund schemes. ...
  • Returns Compared to the Fund Benchmark. ...
  • Expense Ratio. ...
  • Risk Measures. ...
  • Portfolio Level Information.

What is a major advantage of using short term funds? ›

The biggest advantage of a short term loan is that, upon approval, you will often receive funds within a week. If for example, you need to make a quick payment to outstanding bills, or you need to purchase new stock quickly – a short term loan will help you meet your cash requirements immediately.

Is it better to finance long term or short term? ›

Long-term loans tend to carry less risk for the borrower, but interest rates tend to be at least slightly higher than for short-term loans. Long-term financing is typically used to cover equipment purchases, vehicles, facilities, and other assets with a relatively long useful life.

What is the disadvantage of short term investments? ›

1. Limited Growth: Compared to long-term investments, short-term options may not provide the same level of significant wealth accumulation through compound growth. 2. Greater Effort Required: Constant monitoring, research, and active management may be needed to identify lucrative short-term investment opportunities.

Is it better to invest in short term or long-term bonds? ›

All else being equal, a bond with a longer maturity usually will pay a higher interest rate than a shorter-term bond. For example, 30-year Treasury bonds often pay a full percentage point or two more interest than five-year Treasury notes.

What are the risks of short term investments? ›

The safety of short-term investments comes at a cost. You likely won't be able to earn as much in a short-term investment as you would in a long-term investment. If you invest for the short term, you'll be limited to certain types of investments and shouldn't buy riskier assets such as stocks and stock funds.

What are the risks of long short funds? ›

Long/short funds are designed to maximize the upside of markets, while limiting the downside risk. For example, they may hold undervalued stocks that the fund managers believe will rise in price, while simultaneously shorting overvalued stocks in an attempt to reduce losses.

What is the largest source of short term funds? ›

Trade credit

A firm customarily buys its supplies and materials on credit from other firms, recording the debt as an account payable. This trade credit, as it is commonly called, is the largest single category of short-term credit.

Which mutual fund is best for long term? ›

List of Best Mutual Funds in India sorted by ET Money Ranking
  • Quant Small Cap Fund. EQUITY Small Cap. ...
  • Quant Mid Cap Fund. ...
  • Kotak Infrastructure and Economic Reform Fund. ...
  • Quant Multi Asset Fund. ...
  • ICICI Prudential Value Discovery Fund. ...
  • ICICI Prudential Focused Equity Fund. ...
  • DSP Healthcare Fund. ...
  • Parag Parikh Flexi Cap Fund.

How do I know which mutual fund is best to invest in? ›

To choose a mutual fund, define your investment objectives (e.g., retirement, education, wealth creation), choose a fund category (equity, debt, hybrid) based on your risk appetite, and evaluate historical returns, expense ratios, and fund managers.

How many different mutual funds should I invest in? ›

While there is no precise answer for the number of funds one should hold in a portfolio, 8 funds (+/-2) across asset classes may be considered optimal depending on the financial objectives and goals of the investor. Further, higher allocation of portfolio to the right fund is of crucial importance.

Is it good to invest in mutual funds for short term? ›

Short-term mutual funds are good for people who don't want to take big risks with their money. Long-term mutual funds are better for people who are okay with taking a bit more risk and leaving their money invested for a longer time.

Are short term or long term gains better? ›

Key Takeaways

Gains from the sale of assets you've held for longer than a year are known as long-term capital gains, and they are typically taxed at lower rates than short-term gains and ordinary income, from 0% to 20%, depending on your taxable income.

Is it better to hold stock long term or short term? ›

Long-term stock investments tend to outperform shorter-term trades by investors attempting to time the market. Emotional trading tends to hamper investor returns. The S&P 500 posted positive returns for investors over most 20-year time periods.

Is it better to invest in short term or long term bonds? ›

All else being equal, a bond with a longer maturity usually will pay a higher interest rate than a shorter-term bond. For example, 30-year Treasury bonds often pay a full percentage point or two more interest than five-year Treasury notes.

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