Short-term or Long-term Investment?

Elections in the world’s largest democracy are always a huge event attracting global attention, with various parties splashing their colours in all parts of the country through rallies. Politicians going all shades of red and blue taking on their opposition and are making the electorate wondering whom to vote for.

Another event attracting global attention is the rise of the S&P BSE Sensex, crossing the 22,000 levels on 24^th March 2014 and closed at 22,339.97 levels as we write the article today on 28^th March, 2014.

Just as we have a choice of candidates and chose whom to vote for - do we vote keeping the short term promises in mind, or do we vote for someone who has a long term vision for the constituency and for the country. We have a similar choice when it comes to investments, we can either choose to be a short term investor read speculator or focus on the long term and be a disciplined investor. What would you vote for?

While most of us will probably vote or choose to be a disciplined investor, the recent bull-run in the markets might have enticed you to book profits. As the market continues to move in the upward trajectory, what distinguishes a long term investor and a speculator?

The answer is what we have mentioned in our earlier articles. Disciplined investors would use a long-term strategy for their investments in line with their individual goals. They seek to build a secure portfolio with well-diversified investments. They don't panic or get overwhelmed when the market swings and keep holding onto their investments. They avoid taking any prompt short term measures which could damage or tamper their portfolio in the long run.

Who are Speculators?

Speculators on the other hand are less concerned about long term investments. They have little interest in understanding the underlying businesses or assets that they have invested in. They are prepared to take high risks in the hope of making quick and large gains. This is especially dangerous in case of investments in equities. They try to time the market on the basis of their research or from the ‘hot tips’ that they receive from their sources and potentially end up losing their money.

Risks in Speculation

Speculative investments involve a high level of risk. Speculation needs all the know-how of the markets. Predicting market swings is the key in speculation. Understanding which factors might move the market over the short term is a complex task and needs a lot of research and financial expertise. Not everyone is blessed with these abilities and hence may lose their hard earned money in speculation.

Avoid speculation, be a long term investor

If you want to be successful in your investments then it is important to be a disciplined investor rather than a mere speculator. Firstly, set realistic future financial goals and gauge your risk taking abilities. Only then select an investment vehicle to achieve those goals. Investing in Mutual funds can be one of the options where you can park your hard earned money and take a big stride forward towards planning for your future financial liabilities. Investing in mutual funds involves professional Fund Managers managing your money.

If you have a reasonably high risk appetite and a long term investment horizon, then equity funds can be one of the vehicles to park your money. Please note that like equities - equity funds too are 'risky' but in the long run they may help to create wealth out of your savings. While the risk factor is always higher with equities, one should not ignore the high potential of gaining returns from them over a longer period of time.

While investing in equity funds you could look at investing in a diversified Equity fund. The reason for this is diversified equity fund are comparatively less risky than the sector and thematic funds. Sector and thematic funds are very volatile. Their portfolio is concentrated and depends on the performance of a particular sector or theme. So, if the performance of that sector or theme goes down, your fund performance also gets affected. But, unlike sector and thematic funds, diversified equity funds have a diverse portfolio that is cut across different sectors to reduce the amount of risk in the fund. Actively maintaining diversification prevents one sector influencing the entire portfolio.

Creating a long term investment plan can be an easy task but sticking to that plan is what distinguishes investors from speculators. Disciplined investors stick to their plan while speculators take short term measures and might end up losing their money. So don't be a speculator, if you don’t need the investment that you have made urgently, let it be in the scheme for as long as possible, regardless of the market movements. Let it grow. Give them the time to earn compound interest. Therefore, if you have invested in a good mutual fund and until and unless it is a ‘no more options available’ situation, it is advisable not to pull the plug on the investment that you have made. However, you should also consult your financial advisor before taking any financial decision.