Return on investment and time frame share a unique relationship. If you invest in the same financial instrument using any online investing platform, your return will be separate for both for two different time frames. This is due to the compounding of the returns and the probability of weathering the market ups and downs.
Long-term investment goal and investment
Long-term investment or financial goals are those for which you have a time frame of at least 5 years and above. Suppose you buy certain stocks via an online investing platform today, and hold them for 6 to 7 years. This can be considered a long-term investment. As per taxation, equity investment over one year and debt investment over three years are considered long-term investments. However, while planning your investments, investing for the long term should mean a minimum duration of five years and more.
The best investment vehicle for long-term investment is equity investment. Often people shy away from direct equity investment due to the volatile stock market and the risk involved. However, when you are investing for the long term, you get the time to weather the market ups and downs.Read the book on Margin of Safety by Seth Klarman and learn how you can effectively manage long term investments.
Thus, investing in equity can help you accumulate more wealth than other financial instruments over the long term. For instance, if you had invested in the SBI share on Jan 1, 1999, you would have gained 3274.42% of your investment as of Ap 20, 2022. Yes, in these 24 years, the SBI share price has increased more than 3000%.
Similarly, if you had invested in Bajaj Finance share in 2002, in these 20 years, you would have gained 122491.30% on your investment as of 20-Apr-22.
So, if you are thinking about how one can accumulate this unbelievable amount with such a small investment, then this is the power of compounding and long-term investments.
Short-term goals and investments
Now coming to short-term goals and investment planning, the importance of investing in debt instruments needs to be understood.
You have limited time when you invest for a shorter duration for financial goals like buying a car in 2 years or going on a foreign vacation in 3 years. For short-term investment, mixing up equity with debt is crucial for risk mitigation, and you don’t have time by your side to weather the market volatility. Equity investments also churn out huge profits/returns in a shorter duration.
For instance, if you had invested in Adani transmission share or Max Healthcare Institute share in 2020, you would have gained approximately 684% and 236% in just these two years or if you had invested in Polycab India Share in 2019, there would be 327.2% increase by now. However, you need to invest in debt instruments like government bonds, treasury bills, and others to mitigate the market risk.
The investment vehicles or the assets, which provide exponential returns over the long term might not be a great investment for short-term goals and vice versa. So, categorizing your investments as per your short- and long-term financial goals is important.