Introduction of Long Term Investments
Investment with the intention to help for more than the specified period of time with the aim of gaining substantial value increment is known as long term investment. Such a specified period is conventionally accepted as 12 months through the globe. Generally, long term assets are disclosed on the asset side of the balance sheet under non-current asset heading as disclosed below:
Extract of the Balance Sheet
|Long term investments||XXX|
The long term investment is undertaken with a large amount of faith, trust, and belief that the target investment is going to perform very well in a long duration of time. Such target investment can just equity investment in any company or it can be an investment in the project along with taking risk of the same. Generally, under the generally accepted accounting standards, it is very prudent that all the investments beyond the period of 12 months should come under the category of long term investments.
Following are characteristics of Long term investments:
- Long term investments are undertaken with the aim of gaining the price appreciation in the longer duration time
- Such investment horizon can be of 12 months
- Long term investors are willing to undertook high amount of risk
- The chances of gain under long term duration is much more as compared to short term duration
- Long term investments have a direct impact on the ratio analysis of the company.
Examples of Long Term Investments
Following are the examples are given below:
Mr Peter is having surplus fund of $ 1 million. He wanted to grow his capital with manifoldstime. He is having option given below 2 options to invest
- Liquid mutual fund scheme that gives 6% return in 10-12 months of horizon
- Stock that gives 5% return constant based on the trend of last 5 years
Where Mr Peter Should Invest?
If Mr Peter is risk taker investor and have a good understanding about the market, then he will go with Option ii. Reason is Mutual funds are directly dependent on the market scenario. 6% based on market is for 10-12 month horizon. There are fair chances that post that market can take U turn. However, Stock that has given 5% growth in last 5 years is of much more prudent investment option for long term investors. Thus Mr Peter should invest in the Stock for earning a 5% constant return.
ABC Corp is a tech giant with a presence across the globe. However, they are having minimal presence in the area of artificial intelligence, where they are aiming to gain a pioneer position by 3years of time. They started placing the resource in the field to identify the customers, their requirement, and to do the market research how this technology is getting operated and where there is scope for huge demand in the future.
Such expenditure with long term vision is considered as Long term investment.
In the market various investment instruments are available with different rate of return and different horizon period. Mr Thomas is having surplus cash of $ 10,000 and he is having no plan of using it in foreseeable future. He invested the same in the government securities giving 8.5% for the duration of 10 years. This the most simple example of long term investment in our day to day life
How Long is Long Term in Investment?
Long term is very subjective in nature. Every individual will be having different philosophy what is long duration for them. However, across the globe, as per generally accepted accounting principles, long term investments means any kind of investments that are invested for the period more than 12 months. However, given below are the broad categories of investment periods for which investors invest with the mind set of long term investments:
With 1 Year Horizon Period
Generally, for mutual funds and deposit people prefer 1 year investment horizon. Minsdet of such investors is that they want to invest for long term but not more than 1.5 to years. Such investors are both risk-averse and risk-takers.
With 3 Year Horizon Period
3 years is considered as one side of the economic cycle. Effect of short term volatility gets absorbed and the new trend can be possibly seen in the market. 3 years of the period can be accepted as a trend in any market and provides direction towards which further movement of prices can be seen.
With 5 Year Horizon Period
Investment in any instrument of any 5 years or above are the prolonged duration for long term investment. Investors with high amount risk takers having a strong vision about the specific trend in the prices belongs to this category, They will remain firm in their investment decision and will not change their decision. Generally, Investors in real estate comes in this category.
Where to Make Long Term Investments?
Following are the different instruments, where investors can do the long term investments:
- Stocks: Investments in the equity of any companies is getting covered here. Investors having a strong belief on the management and operations of the company will invest in their stocks for the prolonged period of time.
- Exchange Traded Funds: Exchange traded funds are the pool of investments from large group of people invested in variety of stocks based on the expertise of the fund trader. These are very famous presently in the market.
- NPS: Pension schemes are always favorite for the salaried class of people. Post-retirement, in order to secure their future they will invest in such schemes and will try to get a good amount of pensions.
- Real Estate: Investment in real estate is always undertaken with a view that prices of specified property will grow in the foreseeable future.
Short Term vs Long Term Investments
Short term vs long term investments are given below:
|Sr No||Point||Long term investments||Short term investments|
|1||Definition||Long term investments are done with motive of investing for more than 12 months of period||Short term investments are done with the motive of investing for less than 12 months of period|
|2||Example||Investment in Real Estate||Investment in 6 months FD|
|4||Risk matrix||Having high risk as future is uncertain||Comparatively low risk as trend can be easily predicted for short period of time|
|5||Need for research||Requires very in depth research||Requires comparatively less research|
|6||Chances of recovery||In long term, recovery of any fall is possible. Hence there are high chances of recovery.||Short term movements are based on ongoing events. Due to this recovery becomes very tough in short term markets|
|7||Impact of mark to market||Period end fair valuation of long term instruments affects the balance sheet||Period end fair valuation of short term instruments affects the income statement|
|8||Current/Non-Current||They are non-current instrument||They are current instruments|
Advantages and Disadvantages
Below are the advantages and disadvantages mentioned:
Following are the advantages:
- Volatility Based on Current Event Can Be Ignored: In the long term horizon, economic movement can be predicted in both side. Hence, chances of recovery increases, hence the impact of present events can be ignored in the long run.
- Exemption From Taxation: Generally, gains from long term invested instruments is exempted in all the countries. Due to this such instruments get tax effective.
- It Is More Cost Effective: Cost of capital can be easily recovered in the long term investment as it will remain same however rate of return will be keep on increasing.
- Benefits of Compounding: In Long term instrument, the Invested amount will get reinvested in the second year and it will go on. This helps in earning a return on principle and also interest on interest. This gives the compounding effect of earning.
Following are the disadvantages :
- Capital Gets Blocked: Capital in long run gets blocked for pro longed duration. This may also get result in the opportunity cost of losing a better opportunity.
- Patience: Long term investors must be highly patient with peace of mind. In long duration, they will see many ups and downs and they require to come out of that.
- Monitoring: Long term investments are needed to be constantly monitored and need to observe the market that can have a direct impact on the portfolio.
Tips for Long Term Investments
Below are the tips are given below:
- Keep Portfolio Well Diversified: As all say, never keep all eggs in the same bucket. That saying applies in the field of investment as well. One should always try to invest in a different industry, different sectors, and different investment instruments.
- Retirement Fund: Always do the investment of some of the amount in retirement funds. This will keep you well protected for your retirement age.
- Manage You Risks: Always try to balance the risk. Never get exposed to the risk of any specific nature, this may result in disaster. Hence always keep yourself well balance in terms of risk.
All investors want to invest with only one aim of earning high returns. If one is able to manage the correct proportion of risk with the correct amount of time, they will be able to earn an enormous amount of return. Market rewards to them who is having the courage to sustain in the market for a longer duration. Long term investors falls in this category. Thus, investment in the long term is one of the good opportunity which requires a good amount of research and alertness.
This is a guide to Long Term Investments. Here we also discuss the introduction to Long Term Investments. how long is the investment along with some tips, advantages and disadvantages. You may also have a look at the following articles to learn more –