Short-term or long-term: Which is better for mutual funds?

Posted On Friday, Feb 28, 2014

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‘What’s the score?’ Quantum Mutual FundDo you agree when we say that ‘What’s the score?’ is one of the most frequently asked questions now a days, everywhere? May it be with your office colleagues or your best buddy group all that you must be talking about must be which team will make it to the finals or what should be that ‘special strategy’ the teams need to use.


With the ongoing One-day series already making buzz and T20 competitions on its way, yet again, one wonders if fans have settled for this ‘three-hours-thrill’ or still look up to the traditional 5 day game in whites. While the shorter version of the game might attract you with more glitz and glamour, there are still people who love to devote their time in the longest format of the game i.e. Test cricket, where the actual skills and patience of the players gets tested.


Its two different formats or approaches to essentially the same game. One is a rapid fire, adrenaline pumping approach where the game ends in a couple of hours. The other is a ‘test’ of patience and skill which lasts for 5 days.


One’s approach to investing is no different, you have two types of investors, one - who look at a short term investment horizon and aim to earn high returns instantly and the others who believe that slow and steady wins the race and that a long term overview will nurture their investments properly. Unfortunately, many of the Investors seem to have lost their patience to invest for a long term. All they want is quick returns which lead to frequent churning of the portfolio, which may hinder their money from growing smoothly and systematically.


Investing is always a long term phenomenon. You should give your investments fair amount of time to generate decent returns for you. Investing for a long term can be related to test cricket as the investor can plan and rationalize his investments without any hurry. Some people may find investing for the long term very boring as they find test cricket boring but they should always remember that test cricket extracts the true potential out of the player as it examines whether the player has the correct temperament and discipline to sustain the game for 5 days. Similarly, when you invest for the long term, you imbibe the correct discipline of how to invest which may help you with the opportunity to make the most of your investments. Long term investments also help you to get benefits like:


Helps to compound your money:

The long-term mindset for your investments is the key to compound your money. Compounding is the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings. The earlier you start and maintain the long-term outlook, the more time compounding has, to work its magic.

Lowers your Risk:

Having a long-term investment approach may often help you to reduce the probability of experiencing low or negative returns because when you invest for a longer term, your investments are less affected by short term volatility. So if you are involved in long term investment, you will not be affected as much by short term instability due to factors such as liquidity, government rules and regulations, sudden boom of a particular sector or security which may make the price of a security or related security over or undervalued. Long-term investors may ride out down markets without dramatically affecting his or her ability to reach their goals.

Tax Effect:

In India, for Individuals/HUF short term capital gains is taxable at 15% + 10% Surcharge* + 3% cess for equity oriented schemes and 30% +10% Surcharge* + 3% cess for other than equity oriented schemes. However, for Individuals/HUF, long term capital gains are totally exempted from tax for equity oriented schemes and 10% without indexation or 20% with Indexation whichever is lower + 10% Surcharge* + 3% Cess for other than equity oriented schemes.
* Surcharge at the rate of 10% shall be levied in case of individual / HUF unit holders where their income exceeds Rs 1 crore.

Prevents costly mistakes:

Losing sight for the long term and thinking that you can time the market by exiting at the peak and re-entering the market at the trough over the short term may be a big mistake. Timing market shifts correctly is a very tedious full-time job. Therefore, having a long term investment approach and making modest adjustments to your strategic asset allocation based on current market analysis eliminates the losses if you fail to time the market correctly in a short term approach.


Short term investing may be considered to be speculation. It is because there is a great deal of risk involved and often people may lose money when they do this. As in case with T20 cricket, the batsman takes risk right from the first ball and tries to whack everything that comes in his way. In some occasions the batsman succeeds and in some he fails. So the amount of risk is very high. Similarly, short term investments accompany a huge amount of risk. The main aim for short term investment is quick returns, which may be generated in some cases but a wrong decision may eat up your entire savings.


Although many people manage to build sizable amounts of wealth by jumping from one investment to another, the odds are against you if you try to follow in their footsteps. One wrong move and your portfolio's value could suffer irreversible damage. In the long-run, buying and holding may probably leave you in a better financial position.


However while you still must be deciding whether you are a T20 (short term) investor or a Test (long term) investor, remember the line that Warren Buffet quipped when asked what the right holding period is – “Our favorite holding period is forever.”




Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – https://www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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