Long-term Vs Short-term Investment Risks: What You Need to Know?

Investment risk is inherent to any investment. Irrespective of whether you invest in market-linked products or fixed-income instruments, risk will exist in some form or another. There are no risk-free investments in the ideal world. However, understanding and managing these risks is crucial.

That said, long-term and short-term are the two primary types of investment risks.

What is Investment Risk?

In simple words, investment risk is the risk associated with an investment. It is the probability of losses against the expected rate of return. While it is common for investors to have an affinity for low risk, it is equally true that the higher the risk, the greater the chances of returns.

Types of Investment Risks

Let us understand the types of investment risks based on duration.

1. Long-term Investment Risks

   A long-term investment is one of the types of investments people make to accomplish long-term goals, such as higher education for children, retirement, etc. Types of financial risk associated with this form of investment are:
   • Inflation
     Inflation erodes the purchasing power of money with time. Long-term investments often face this risk where inflation has a decompounding effect on your investment's returns.
   • Market volatility
     Long-term investments in market-linked products face this risk. Products such as ULIP plans, stock investments, mutual funds, etc., are highly subject to market volatility.
     While investing in life insurance products like ULIPs, whose underlying portfolio comprises equity and debt instruments, there are chances of market volatility reducing returns. That said, if you stay invested for the long haul, ULIPs have the potential to even out volatility risks with time.
     Also, a long-term saving plan like a ULIP can help you secure your family's future in your absence and accomplish the twin goals of insurance and investment with a single product.
   • Liquidity risks
     Liquidity should be one of the major lookouts for any investment. It's the ease with which you can convert your asset into cash. However, long-term investments often face liquidity risks where you may not be able to sell quickly and at a fair price.

2. Short-term Investment Risks

   Short-term investments are investments made to accomplish short-term goals, i.e., goals that are a few months to a few years away. On most occasions, short-term investments are made in fixed-income instruments that offer assured returns. However, they, too, carry certain risks, which include:<
   • Interest rate risk
     One of the major risks associated with short-term investments is exposure to changes in interest rates. Rising rates can reduce the value of bonds that share an inverse relationship with interest rates.
   • Concentration risk
     Concentration risk refers to investing in almost the same kind of financial assets. For instance, your preference for absolute safety may force you to invest in the same or similar financial instruments.

Overcoming These Investment Risks

Some ways to mitigate different types of financial risks include:

1. Invest in inflation-beating instruments

   Investing in inflation-beating instruments like ULIPs with equities as their underlying investments can help you overcome inflation risks and ensure your money grows with time. ULIP is one of the prudent investment options with high returns.

2. Invest in liquid instruments

   Invest in liquid instruments that you can easily convert into cash whenever required to overcome liquidity risks.

Long-term vs Short-term Investment Risks: A Comparison

The table compares long-term and short-term investment risks on various parameters:

Conclusion

Embracing risks and taking effective measures to mitigate them is crucial for any investor. An investment risk makes you more aware and makes you develop strategies accordingly.

PNB MetLife offers a wide range of insurance products that help you mitigate life's uncertain risks. Be it protecting your family's financial interest in your absence, safeguarding your child's future or your retirement, we have you covered.

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