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)


Short Term Mutual Funds vs Long Term Mutual Funds? ›

Short-term investments tend to be riskier due to higher market volatility and uncertainty over short periods. Long-term investments offer the potential to withstand market fluctuations and provide smoother returns over extended periods, reducing overall risk.

Are mutual funds better for long term or short term investments? ›

Mutual funds are designed for longer-term investors and are not meant to be traded frequently due to their fee structures. Mutual funds are often attractive to investors because they are widely diversified. Diversification helps to minimize risk to an investment.

What is the difference between short term fund and long term fund? ›

Duration: The most evident difference between short and long-term financing is their duration. Short-term loans normally have a repayment duration of year or less, though some might be as short as a few weeks or months. Long-term loans, on the other hand, have a longer repayment period, which might last several years.

Which is better short term or long term investment? ›

There is no clear winner here as both have their pros and cons. Short term investment allows you to achieve your financial goals within a short span, with a lower risk. On the other hand, if you have a greater risk appetite, wanting higher returns, you can select long term investment avenues.

What is the difference between short and long funds? ›

Long/short funds use an investment strategy that seeks to take a long position in underpriced stocks while selling short overpriced shares. Long/short seeks to augment traditional long-only investing by taking advantage of profit opportunities from securities identified as both under-valued and over-valued.

Which type of mutual fund is best for beginners? ›

Overview of the Best Mutual Funds for Beginners
  • Quant Small Cap Fund. ...
  • Quant Infrastructure Fund. ...
  • SBI Tax Advantage Fund-III. ...
  • Quant ELSS Tax Saver Fund. ...
  • Nippon India Small Cap Fund. ...
  • Axis Small Cap Fund. ...
  • Quant Mid Cap Fund. ...
  • ICICI Pru Smallcap Fund.
Mar 28, 2024

Which is more profitable short term or long term? ›

Understanding Short-Term vs Long-Term Profits and Assets

Assets held for a longer time can be appreciated, meaning their value increases over time. On the other hand, short-term assets may depreciate, meaning their value decreases over time.

Is it good to hold mutual funds for long term? ›

Long-term mutual funds offer several advantages for investors seeking to build wealth over time. These benefits include: Compounding: Long-term mutual funds harness the power of compounding, where returns are reinvested, leading to exponential growth of the investment over time.

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.

Which type of mutual fund is best for long term? ›

For long term investments, consider equity funds as they offer the potential for the best returns. Choosing a growth mutual fund option can help you achieve your long-term goals as your returns will grow through compounding over time.

Which is riskier short-term or long-term? ›

Reduced Risk: Long-term investments tend to be less risky compared to short-term ones since they have more time to overcome market fluctuations and potential downturns.

Why is long-term better than short-term? ›

Both approaches have their potential benefits, but long-term investing potentially provides an increased chance of a higher return through compound growth and the recovery of losses over time.

Which is more riskier short-term or long-term? ›

Bonds can have maturities starting from one to 3 years. Because our money has longer to recover after losses, a long-term investing strategy might include higher-risk investments. Making a long-term investment usually means we cannot be ready to access the funds for a minimum of ten years.

What are the disadvantages of long term funds? ›

Long-term finance shifts risk to the providers because they have to bear the fluctuations in the probability of default and other changing conditions in financial markets, such as interest rate risk. Often providers require a premium as part of the compensation for the higher risk this type of financing implies.

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.

Does long mean buy or sell? ›

In the trading of assets, an investor can take two types of positions: long and short. An investor can either buy an asset (going long) or sell it (going short).

Are mutual funds good for long term investment? ›

Long-term mutual funds offer several advantages for investors seeking to build wealth over time. These benefits include: Compounding: Long-term mutual funds harness the power of compounding, where returns are reinvested, leading to exponential growth of the investment over time.

Are mutual funds better long term? ›

Generally speaking, mutual funds — especially equity mutual funds — should be considered a long-term investment. Which mutual fund is the best fund to invest in? That really depends on your own goals, risk tolerance and the rest of your portfolio.

Are mutual funds good for short term? ›

Unlike a typical money market, which is an FDIC-insured cash account, money market mutual funds are a basket of investments that hold your money in high-quality, short-term debt instruments, cash, and cash equivalents and are not insured by the FDIC.

What is the best duration to invest in mutual funds? ›

Investors might make a lump sum investment in mutual funds if they have a sizable amount of funds. They may invest in SIPs if they are prepared to put aside a fixed sum on a monthly basis. For both of these, the investor must hold the investment for a minimum of three to five years in order to receive high returns.

Top Articles
Latest Posts
Article information

Author: Lakeisha Bayer VM

Last Updated:

Views: 5988

Rating: 4.9 / 5 (69 voted)

Reviews: 84% of readers found this page helpful

Author information

Name: Lakeisha Bayer VM

Birthday: 1997-10-17

Address: Suite 835 34136 Adrian Mountains, Floydton, UT 81036

Phone: +3571527672278

Job: Manufacturing Agent

Hobby: Skimboarding, Photography, Roller skating, Knife making, Paintball, Embroidery, Gunsmithing

Introduction: My name is Lakeisha Bayer VM, I am a brainy, kind, enchanting, healthy, lovely, clean, witty person who loves writing and wants to share my knowledge and understanding with you.