Where you hold the investment for more than a year it can be defined as long term investment. For example, Mutual funds with a lock-in period of 18 months (or) Interest paying bonds.
Why do you need these?
We need to match our investments with our requirements. For example, you need groceries every month. You can meet them with your monthly salary. But say you are planning to buy a house for ten years. If you need to buy 2000 dollars at the end of ten years, you have to invest various sums so that they mature correctly after ten years. It would be difficult to collect such a huge amount suddenly. So, a good investment plan is needed to phase the maturity so that your needs are met.
Comparison with short term investments:
- Duration: Long term investment locks your money for a longer duration. They are not like cryptos which yield more in a short span. Get more info here.
- Goals: Typically, the long-term investments help in meeting long term goals of the investor. Short term goals cannot be replaced to suit these needs.
- Interest rates: In these days where interest rates diminish year-on-year, these investments offer good yields in future rates when the prevailing rate of interests will be too low. That is why investors find pension schemes to be advantageous.
- 4. Diversification: Long term investments can be more diversified than short-term
Advantages of investing in the long term:
- Emotions do not have a role to play in long-term investments. You are tempted to sell or quit when the market is volatile during a short-term investment. This part is not there in long-term investment.
- You can get compounded returns in long-term returns i.e interest for your interest. Hence the returns are considerably good.
- It is easier to invest in long-term funds. Usually, the term investment is wide. For example, life insurance policies have a long term. You need to pay a low premium each year. Hence as an investor, you will not be feeling the pinch of shelling out money.
- The returns normally are not taxable. Either you get tax sops during investment (or) the returns are tax-free.
- It gives more security. As an investor people dream more of the retirement fund. These funds help in providing assured income post retirement.
It is good to have a few short-term investments to meet immediate needs. You can have more long-term investments for more security.