Crypto Investing
22 Jan 2021

Long Term Vs Short Term Investing: What’s The Difference?

Farheen Shaikh

Individuals invest with Intention.

When you open an NPS account and contribute towards it for the next 20yrs or so, the intention is to save for retirement.

Similarly, when you set up a Mutual fund for 2/5yrs, you do so intending to use that money after some time.

And depending on your investment’s intention/goal, you either decide to invest for the short term or long term.

Even though there is no firm rule, a long-term investment could be anything where you invest for more than a year. At the same time, short-term investment is where you invest for less than a year.

And based on whether you invest for the short-run or long term, you take varying decisions related to the choice of investment vehicle, investment strategy, and approach.

As a result of which, there are a few clear differences in both investment scenarios, which we will discuss here:

Difference Between Long Term & Short Term Investing

1. Risk

Risk is inevitable in any investment, but the degree of risk is what we are looking at here.

The most obvious risk for investments is market volatility. When you invest in shorter time frames, market volatility is likely to affect you more. Because if a dip happens, you have less time to recover from it.

In contrast, when you invest for longer time frames, the market volatility is curbed because of the possible opportunities where uptrends can offset the dips.

However, you can combat market volatility in the short term if you know how to time the market. Suppose you can predict a dip and exit the market well before it happens, great!

But timing the market is extremely difficult and something not many people can do.

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2. Returns

The returns on investments vastly depend on the investment vehicle and how well you manage your investment.

But one thing to note here is that the longer you invest in an asset, the greater are your chances to earn better returns. When you invest for shorter time frames, you get fewer market opportunities to grow your investments and earn better returns.

While when you invest for longer time frames, as I said earlier, the market volatility is curbed, and you get much more market opportunities to recover from any losses.

However, to earn better than usual returns, you have to manage your funds in the short term actively. In contrast, long term investments don’t require your active involvement.

3. Liquidity

Here liquidity means how easily your assets can be converted into cash, preferably without any loss.

An investor depending upon whether he is investing for the long term or short term invests his funds in relevant instruments that define an investment’s liquidity.

And since people generally opt for short-term investments to park extra cash that they may expectedly need soon, the vehicles they invest in typically have greater liquidity.

E.g., Ultra short-term mutual funds, Bonds, Stock Markets.

Whereas long-term investments generally lack liquidity because of the level of commitment involved.

E.g., the National Pension Scheme, Stock Markets, etc.

You may notice that many vehicles will overlap both ways, but the level of commitment involved will vary.

4. Tax Benefits

Whether you are invested in an asset for a short period or long term, the tax implications on the investments’ returns will vary.

Generally, Taxes levied on long-term investments are less as compared to short term investments.

Let’s say you invest in cryptocurrencies for less than a year. Then the capital gains on your investments will be around 15% or based on your income tax slab.

However, if you had invested in cryptocurrencies for the long term, then the capital gains on your investments would be taxed somewhere between 10% – 20% depending on whether you treat it as equity or not.

Similarly, returns from varyings instruments will be taxed differently based on the vehicle and the investment period.

The Bottom Line

It is tough to judge and declare any of the two ways as a clear winner. While you may see that going long term with your investments looks like a better deal; it may not always be feasible.

Sometimes you want to invest for the short-term because it is better than keeping cash in a bank account.

However, combining these approaches in your profile will help you diversify your investments and achieve your desired goals.

[su_note] KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing. [/su_note]

Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.

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Farheen Shaikh

Content Writer

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