The period over which investors stay invested in an investment option is referred to as the investment horizon. This investment horizon decides their desired exposure to risk and income needs, all of which contribute towards the selection of securities. Determining the investment horizon is one of the crucial steps an investor must take when creating a portfolio.
As an investor, remember that your choice of level of risk and the investment horizon will play a significant role. Make sure that safer debt investments fund your medium and short-term goals. Bank deposits are a good investment, as are liquid funds that can help you reach your short-term goals of a few months to a year. For goals that span a couple of years, you may choose from short-term debts to bank deposits. If your investment horizon exceeds five years, then equity is a good bet.
When your investment horizon extends in length, the equities bring a higher risk-adjusted return as compared to income securities of fixed nature or cash. In short, investment horizons and equities tend to get riskier as an asset class because there are higher levels of volatility attached to them.
Depending on the type of mutual funds, the investment horizon for the same can be classified as short-term, long-term, and medium-term funds.
These funds usually have an investment horizon of 1-3 years. A period of fewer than 36 months for debt funds and less than 12 months for equity and balanced funds is defined as a short-term investment horizon.
These funds have a longer investment horizon of more than 36 months (3 years), and the investors typically stay invested for 5-7 years. Debt funds with an investment horizon of 1-5 years and equity funds with a tenure of 3-7 years fall into this category.
These funds have the most extended investment horizon that can last up to 10 years or more. Debt funds with tenure between 5-20 years and equity funds with an investment horizon of 7-20 years fall under this category.
If you want your investment portfolio to have proper diversification, then you must ensure that it comprises of various asset classes. You can look at a longer investment horizon and be able to take more risk as this allows the market many years to recover.
Certain investment options have a structure with their own time horizons. For the long-term investor, stocks are considered ideal as small-cap stocks are known to be risky: For the long-term investor, stocks are considered ideal as small-cap stocks are known to be of a risky nature.