Most of the time when we are discussing with clients, their first question is ” Where should I invest my money to get the best return”. If you are a regular reader of our articles, then even you will be able to answer this question that Returns are not the goals in Investment. But this time around, we will explain a bit how to invest for short term goals and how to invest for long term goals.
What is Long term & Short term
Before, we start on this topic, let us explain what short term is and what long term is. Because many investors don’t really understand this concept and to many, even 1 years seems to be long term! Short term investment is anywhere 1 year to 3 year. Period less then 1 year would come under Ultra Short Term. Investment horizon of more than 5 years should ideally fall under Long Term investments. Now a period between 3 to 5 years is combination of long term and short term and we would classify as Medium Term Investments.
We will try to understand it by analogy
Just imagine a situation where you have to go to nearby grocery shop. Would you take Airplane for this purpose. Sound funny! Let us change the example, you have to go to Canada for a vacation. Would you go walking or take cycle for this purpose. Sound irritating!
What we want to convey is that you should choose your INVESTMENT VEHICLE depending on how far you have to reach. We use high speed vehicle only when our target is far away; similarly high return investment like equity should be used only for long term goals. On the contrary, for short distance, we use vehicle with slow speed and same thing applies in investment. For short term goals, we need to use low vehicle like Debt.
Ownership VS lending in investments
When we plan for long term investment, the speed on the return on investment should be high. Not just because you have to make more money but you have to beat inflation in long run. You have to make sure that the returns on investments are greater than the rate of inflation. This can happen only when you invest your money in Ownership Assets. Ownership assets have short term fluctuations but in long haul, they beat inflation and create wealth. Long term Financial investment which beat inflation is Equity and it is equity which creates wealth in long term. When we talk of equity, we would like to clarify that we don’t advocate people to invest in equity directly unless they have in depth knowledge of markets. For people who are not specialist, it is better we leave to professionals and invest in Equity Mutual Funds.
When we want to plan for short term investment, the need is to preserve the wealth and not to create the wealth . Do understand the difference between income and wealth. Since the tenure is short, one cannot take any risk of fluctuation and hence we should be in lending assets. Lending assets in financial term is called Debt. Debt is an instrument where get returns in the form of interest. Typically, people relate the word interest with FDs, Post Office schemes etc. but there is much larger universe of debt. In fact, from the point of view of Income Tax, it is better that returns are taken in the form of dividend and capital gains rather than simple interest. The option available in Debt instruments are huge but typically investor has limited knowledge of it. Debt instruments are FDs, Bonds, debt based Mutual Fund Scheme such as Short Term Funds, Gilt Funds, Liquid Funds, floater etc. Depending upon the liquidity needs and taxation, the product should be taken debt category. Read FD VS FMP
As legendary investor Warren Buffett quoted “Investor has to do very little things right as long as he avoid Big Mistakes.”
Investor make mistake of choosing wrong vehicle for their investment. Practically, Equity should be for Long term and Debt for short term, but investor do the the opposite, Equity for short term and debt for long.
Guess which is the world’s most expensive hobby…… “Equity Trading”
Think of your own portfolio and analyze.
Love to hear your comments.