There are all kinds of buyers and sellers in the stock market. They could be classified as traders or investors based on how long they hold a stock. Traders churn stocks very frequently in order to earn profits. They buy stocks with a view to sell them in a few months, weeks or days, sometimes even a few minutes. Investors, on the other hand, have the goal of making profits over an extended period of time, over years, sometimes even decades.
So when it comes to equities, which strategy of the two should you adopt? In other words, should equity investments be for the short term or long term?
Trading is a different game altogether, and to be successful at it one needs to have a certain amount of money to start with, dedicate time on a daily basis, develop a level of experience and have significant risk tolerance. Since this strategy is not meant for the average person hoping to meet important life goals with equities, we’ll shift focus to investing.
When you invest in equities, whether it is directly or through mutual funds, you expect to make profit by buying stocks a low price and holding them till they reach specific price targets, or perpetually in some cases, and earn dividends*. Now, although a stock’s price ought to reflect the value of its business and future earnings expectations of different buyers and sellers of the stock, sometimes it can stray for some time. Stock prices are affected by a lot of factors that could be directly or indirectly related to the business or general economy. As a result, on a day-to-day or week to week basis, stock prices can experience fluctuation. However, in the long run, stock prices can reflect the sentiment of market participant about the business. Therefore, a stock’s price, although it may see a lot of ups and downs in the short run, can climb up in the long run. And therefore, equity investors need to give time for their mutual funds to grow and for returns to compound over a long period. Short term investments in equities can turn disappointing, due to the inherent volatility risk of equities, as discussed above. Being invested for a minimum period of 5-7 years is advisable for equity investments.
However, what if your goals are short term, where do you invest then? Go with balanced funds, if you can stay put for 3-5 years. Dynamic bond funds are also an option. For still shorter durations you can consider short term debt funds. Goals that are expected to materialise in 6 months to 1 year can be met through liquid funds, giving you considerable returns.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
* Dividends are subject to availability of distributable surplus and approval of Trustees.