Short-Term vs Long-Term Mutual Funds: Difference & Which One is Better?

In mutual funds, you can invest in various funds and schemes with different time horizons. And the time duration of the investments in mutual funds is categorised into short-term and long-term. Understanding the difference between short-term and long-term mutual funds is very important before you choose to invest in such mutual fund schemes.

What are Short-term Mutual Funds?

Short-term mutual funds are the funds invested by the AMCs or mutual fund companies in securities having an investment time horizon ranging from six months to three years. These are the low-risk investable instruments like short-term debt securities or government bonds, money market instruments and corporate bonds not sensitive towards market fluctuations.

One of the main objectives of short-term mutual funds is to get stable returns with liquidity to preserve the capital in the safe zone. These types of funds are designed for the conservative types of investors having a moderate risk appetite.

What are Long-term Mutual Funds?

Long-term mutual funds are funds created for investors with the perspective of a long-term time horizon. In long-term mutual funds, equities and diversified balanced funds are used to invest. The time horizons of long-term mutual funds are usually more than three years up to ten years and give better returns to the investors.

The long-term funds are meant for long-term investment with the potential to give high returns. However, there are greater risk of market volatility in long-term investment but can give lucrative returns if held for long years.

Short vs Long-Term Mutual Funds Difference:

Aspects	Short-term Mutual Funds	Long-term Mutual Funds
Liquidity	Short-term mutual funds are highly liquid with the feasibility to liquidate the funds in a shorter period.	Long-term mutual fund investments have a long maturity life, hence the liquidity level is very low.
Returns	In short-term mutual fund investments, the potential for return is low. There is a risk of instability in the market and the rate of return is low due to the short time horizon.	Long-term mutual funds have the potential to give high returns and they can absorb the volatility in price and fluctuations in the market due to the long market cycle.
Safety	Due to the short duration of maturity, such funds are safer than long-term, as they provide you the flexibility to exit from your investment if there is any huge market risk.	Your funds are locked for a long time duration and are less safe than short-term investments. You can’t exit before maturity, even if there is a risk of uncertain market conditions.
Securities	In this type of mutual fund, mostly short-term investable securities like short-term debts, bonds, treasury bills and corporate bonds are included.	Mostly invested in stocks and long-term debt and securities having more than three years of maturity period to create a balanced fund.
Time Horizon	The time horizon of the short-term mutual funds are usually less than one year and can be minimum as in months or few days.	The time horizon of long-term mutual funds is long as more than one year or can go up to 5 to 10 years.
Maturity Duration	In short-term mutual funds, the maturity period of various securities is short in days, months or a few years providing a short time to exit from the investment.	In long-term mutual funds, the duration of maturity is longer than three years or up to 5 years or more making it difficult to exit from funds.
Risk Profile	Less risk involves providing the option to liquidate the investment anytime during uncertain market conditions making short-term funds less risky.	The lock-in period is long, you need to wait for your investment, and if there is uncertainty or any risk, it is difficult to exit from such long-term investments.
Taxability	Profits earned from the short-term mutual funds investment attract high tax rates.	Capital gains from long-term mutual fund investments are taxed at lower rates.
Investment Goals	The main objective of investing in short-term funds is to get the advantages of market fluctuation and liquidate such funds for emergent needs.	The main motive for investing in such long-term funds is enjoying financial stability at the time of retirement with lucrative returns.
Sensitivity of Interest	These types of funds are not that much sensitive towards the interest rates fluctuations.	The sensitivity of interest rate fluctuation could be high in the long-term investment.

 

Short or Long-Term Mutual Funds, Which one is Better to Invest

Short-term and long-term both have pros and cons and are meant for different types of investors as per their investment goals and risk profile. To make a more better decision that aligns with your investment goals, it is necessary to understand the advantages and disadvantages of investing in short-term and long-term mutual funds, as well as the  key differences between them.

Benefits of Investing in Short-Term Mutual Funds

High Liquidity: The short-term funds are highly liquid in terms of providing the facility to sell your investment and such funds have shorter maturity life.

Highly Flexible: Investing in short-term mutual funds, you will enjoy the flexibility to buy or sell and reshuffle your investment as per the changing market situations. The shorter duration of investment provides you the flexibility to restructure your portfolio as per your investment strategy.

Low Volatility: Though the short-term mutual fund investment can face unexpected movement in the market, compared to the long-term, it is less volatile. In the short-term, you will get less return due to lower yield on your investment but can enjoy stability in your investment.         

High Return in Shortest Time: Compared to other short-term deposits in bank accounts and investment schemes, investing in short-term mutual funds has the potential to give you good returns in terms of earning a higher yield in the shortest span of time.

Benefits of Investing in Long-term Mutual Funds:

Low Transaction Cost: In long-term investments, you can’t buy and sell your funds very often resulting in your transaction cost on such investments becoming low improving your returns in the long run.

Low Tax Liability: Investing in long-term mutual funds usually more than one year attracts lower taxation on capital gain on such investments.

Higher Returns: Another key benefit of investing in such long duration fund, is you will also enjoy the advantage of compounding making your ROI high at the time of maturity.

The benefit of the Market Cycle: Volatility in the market can affect the return on short-term investments, while in the long run, volatility can be easily absorbed by the market cycle.

Conclusion

Both short-term and long-term mutual funds are designed for investment with different time horizons and returns. Short-term funds are highly liquid and safe with shorter maturity periods, while long-term mutual funds can give better returns with the ability to absorb the market volatility due to the long market cycle till the date of the maturity period.

A short-term mutual fund includes usually bonds, treasury bills and debt funds, while in the long-term equities and other long-term investable instruments are included. However, on the redemption of short-term mutual funds you have to pay higher taxes on capital gains, while long-term mutual funds attract lower tax liability on capital gains.

 

• Author: Religare Broking
• Last Updated: December 4, 2024