Are long or short-term investments best?
There is no straight answer to this question. The term will be depend on your needs, which in turn will influence your choice of one fund or another.
When we talk about investing, time is a very important aspect of both the strategy and the goals, affecting the return, the risk assumed and the liquidity of the investment.
So before considering whether it is better to opt for a long-term or short-term investment, let us first remember the differences between each type, where time is a crucial factor.
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Differences between short, medium and long-term investments
- Short-term investments: In this model the duration of investments is approximately one year.
- Medium-term investments: These investments have a duration of between one and five years.
- Long-term investments: These have a duration of more than five years.
Choosing an investment fund
In very general terms, these are the recommendations for the different investment horizons:
- Short-term: money market and fixed-income funds
- Medium-term: mixed funds
- Long-term: equity funds
In view of the current interest-rate environment, investment funds are an ideal instrument for investing little by little, in a systematic way and with a long-term horizon, because successful investments will yield a return on your savings. Given the current climate, this return will be more difficult to obtain from other financial products.
Why invest in short-term funds?
This investment model is firmly based on two criteria: security and liquidity.
Security when investing in short-term funds
Investments with a high level of volatility, such as shares on the stock market, should be avoided because they put the invested capital at risk. The economic environment and the fluctuations of the markets may alter the performance of securities, thereby determining whether the initial capital invested yields gains or losses.
Liquidity of short-term funds
For investors who need money in the short term, a fund is a better option than a deposit. The more liquid a product, the greater the flexibility for retrieving your savings whenever you want and without any penalty. In short-term investments it is essential to operate with this ability.
Where NOT to invest in the short term
- In the stock market because performance is more difficult to predict. This type of investment is more suitable for highly liquid assets, in spite of the risks entailed.
- In fixed income securities because there is much more volatility in the price of these securities. Investment funds that focus their investment on risky assets.
- These deliver a high level of liquidity but it depends to a large extent on the fluctuation of the assets in which the fund invests.