Long Term Investments

Long Term Investments Definition

Long Term Investments refer to the financial instruments in the form of Stocks, Bonds, Cash or Real Estate Assets which the company intends to hold more than 365 days probably to maximize the profits of the company and is reported on the asset side of the balance sheet under the head non-current assets.

Long-term-Investments

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Source: Long Term Investments (wallstreetmojo.com)

Types

Broadly can be divided into the below-mentioned types :

Examples

Advantages

  • Less risk and higher returns: It will always higher returns to the investor who will be invested for a long time, thereby reducing the risk.
  • Power of compounding: An investment held for a longer period will generate higher returns since the compounding of the interest factor plays a vital role.
  • Discipline: It enables discipline in the investor.
  • Wealth creation: It also helps in creating wealth since investing systematically for a longer tenure will give superior returns to the investors.
  • Builds confidence: It builds a sense of confidence among the investors and acts as a cushion when the investment starts performing and generating superior returns to its investors.

Disadvantages

  • Capital is locked: Investing long term results in locking the funds for a more extended period, which might be even difficult to liquidate in time of need.
  • Patience: It requires a high level of patience in the investor to hold on his investment despite any fall in the value.
  • Decision making: Sometimes, it would require a significant amount of homework to be done to select the best investment for the company as one wrong thing can ruin the entire story.
  • Monitoring: Constant monitoring is required to check the health of the investment, whether its deteriorating or not and take appropriate measures to manage the same.
  • Higher risk: Since it is a capexCapexCapex or Capital Expenditure is the expense of the company's total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year.read more to be made, a lot of risks are involved in the same as entire capital would be blocked for a specified period, which cannot be liquidated easily. Hence the risk of not getting the funds back on time is a concern that needs to be looked into.
  • Not meant for speculators: This type of investment is not made for the speculators or the traders who like to earn money daily by buying and selling securities and desirous to be richer in a shorter duration.

Conclusion

Long term investments are one of the types of investingThe Types Of InvestingStocks, bonds, and cash equivalents are the three main forms of investments. Investment, in general, refers to the purchase of anything for future use with the goal of generating a regular cash flow or increasing the value of something over time so that it can be sold for a higher price than it was purchased for, i.e. capital gains. read more in which the funds are locked in for more than a year, and the intent is to carry the same in the books for a more significant period without the intention of selling it. All investors should allocate a certain percentage of their income in long term assets, which will help them to earn higher returns in the long term. Finally, long term investments will always generate  more returns than short term investments due to the power of compoundingCompoundingCompounding is a method of investing in which the income generated by an investment is reinvested, and the new principal amount is increased by the amount of income reinvested. Depending on the time period of deposit, interest is added to the principal amount.read more

This article has been a guide to what is Long Term Investments and its definition. Here we discuss the various types of long term investments on the balance sheet along with the examples. You can learn more from the following accounting articles –