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 Portfolio
A well-balanced 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.
- The 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.
Make 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.Follow Us: