In layman’s terms, ‘time horizon’ is the time span in which an
investment is made or held by an investor before it is liquidated. In most
investment scenarios, the longer you hold your investment the better they work
for you. But the basic funda with time horizon is entirely dependent on an
investor’s goal and its urgency.
Why time horizon should be
considered for investment and not returns?
Investors often drive their investment decisions based on the returns
they expect; while returns are an indispensable factor for making or choosing
an investment option, one cannot simply dismiss the importance of time horizon
in being successful to achieve their desired returns. Being aware of the
effectiveness of one’s choice of time horizon towards achieving a specific
financial goal is important. When weighed in with one’s risk appetite, it helps
to organise one’s investment portfolio through asset allocation.Even when an
investment option offers good returns, it may not be suitable for an investor
because its investment tenure doesn’t match the investment horizon of the
investor. This is whythe time horizon should be considered for making an
investment and not just the returns.
Time Horizon and Investment
investment portfolio comprises of various asset classes that are invested for
different time horizon. On the basis of the investment time horizon of each
fund, they can be labelled as the long-term, short-term or mid-term funds.
Long-Term:Investors can opt for investment with a longer time horizon to
even out its risk burden as the market recovers from its low phase gradually
over time. Usually, in the case of mutual funds, the long-term funds come with
a time horizon of over 10 years. The
equity-oriented funds may come with tenure of 7-20 years while debt-oriented
may come with tenure of 5-20 years under long-term time horizon.
- The Mid-Term:Those who like to keep their investment option
flexible and like to make quick adjustments to their investment portfolio can
opt for a time horizon that is shorter than the long-term but longer than the
short-term. The equity-based funds come with a term that ranges between 3-7 years,
while the debt funds come with a term range of 1-5 years under the mid-term
time horizon category.
- The Short-Term:Investment time horizon that ranges between
1-3 years and is mainly associated with such funds options that aim at
fulfilling short-term financial requirements is known as short-term time
horizon. Under this category, one can invest in equity and balanced funds that
come with a term less than a year and debt funds with a term between 1-3 years.
To make the most of short-term time horizon, put a major portion of your asset
in fixed income investment options and the remainder in equities.
sure to weigh in factors like your risk appetite and time horizon when you plan
to invest your money in a high yielding scheme. You can seek the assistance of
our best financial planners to plan a portfolio that gives due importance to
your goals and time horizon.