Short-Term Savings vs Long-Term Investments

Short term investments help you achieve immediate financial goals. They are low risk investment plans that are typically held for less than 3 years. Some examples of short term investment options include savings accounts, short term FDs, and liquid mutual funds. These investment vehicles offer relatively low returns. However, the liquidity is usually high and there’s potentially low risk.

Long term investments are typically meant for long-term financial goals such as buying residential property or retirement planning . Any investment that is held for 5 years or more is termed as a long-term investment. Though returns from these investments might be relatively high, they often feature higher risk along with relatively low levels of liquidity. Some popular long-term investments include ULIPs, REITs , large cap funds, etc.

We have explained the key differences between short term and long term investments in the table below:

When you choose an investment plan, one key factor to consider is your risk appetite. Taking higher risks could potentially mean receiving higher returns, especially in the case of long-term investments. As these investments are market-linked, you may have to incur short-term losses. However, the long-term gains can be high.

On the other hand, short-term investments are focused on preserving your capital and ensuring adequate liquidity . These investments are suitable if you have a lower risk appetite and moderate to low returns are acceptable. While returns might be lower compared to long-term investments but these investments are typically less affected by market volatility.

Short term financial goals can be achieved within a few months and up to 3 years. Some short term goals include building an emergency fund, purchasing a car or a phone, planning for a trip, etc. To fulfill these goals, you can choose a short-term investment plan like FD, treasury bills, liquid funds, ultra short duration funds, etc.

Long term goals are usually designed to be achieved over a period extending 5 years of longer, while some can require investments lasting decades.. Some popular long term financial plans are buying a house, saving for children’s higher education, creating a retirement corpus, etc. A long-term investment plan can help you achieve your financial goal within the allotted time period. PPF, NPS, ULIPs, PPFs, REITs, investing in gold and silver, etc are some of the best long term investments.

Let’s draw a comparison between long term vs short term financial goals:

The different types of investment options are beneficial in their own way. Depending on your financial goals, risk tolerance, and desired investment tenure, you can choose a suitable investment option. Let’s discuss the advantages of each investment plan:

Just like advantages, each investment option comes with its own set of disadvantages. However, considering all necessary factors before making a choice helps you deal with the consequences. We’ve explained the disadvantages of short-term savings vs long-term investments below:

To decide the most appropriate investment option, you should analyse your goals, risk tolerance and the time horizon. Besides, you should ask the following questions to yourself to be able to take a decision:

You need to be careful about choosing the investment duration when selecting an investment option. Avoiding the common mistakes that individuals make not only helps you receive decent returns but also safeguards your capital. Here are the key mistakes you should stay away from when deciding the duration for short term savings vs long term investments:

To develop a viable financial plan, you should follow the SMART approach. The SMART framework specifies that financial goals should be Specific, Measurable, Achievable, Relevant, and Time-bound. Let’s break down each of them to help you understand how to organise your financial goals:

• Specific: Set clear and specific goals to make your planning easier. Decide the exact amount, purpose and duration. This helps you decide the most appropriate investment option.
• Measurable: You can track your progress with a measurable goal. If you succeed in saving a particular amount each year, you stay motivated. Additionally, you can adjust your plan as per your needs.
• Achievable: Your goals should be realistic. Don’t forget to assess your current income, expenses and liabilities before you decide what you want to save for. Further, it’s important to choose the right investment tenure to be able to meet your goal.
• Relevant: Your goals should align with your life stage and priorities. For example, if you need to pay off a personal loan, you can keep your aim of buying a luxury car on hold. Once your current need is fulfilled, you can work towards saving for the car.
• Time-bound: When you give yourself a deadline, your investments become disciplined. If you aim to buy a house in the next 10 years, you would be more inclined to save strategically to fulfill the goal.