Medium Term (Investments) - Explained
What is the Medium Term?
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Table of ContentsWhat is the Medium Term?How Does the Medium Term Work?Risk Tolerance, Return Rates and Term Lengths
What is the Medium Term?
A Medium-term is a term used in investment to describe an investment holding period of between 1 to 3 years. The time horizon in a medium-term investment is intermediate, the investor is expected to receive the return on investment and the initial capital within 1 to 3 years. Sometimes, a medium-term investment can last up to five years depending on the need of the investor and the type of asset being held. For instance, there are bonds whose maturity period is between five to 10 years and are categorized as medium-term bonds. Generally, the intention behind the investment is a more important horizon to judge an investment as medium-term and not necessarily the investment itself.
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How Does the Medium Term Work?
Medium-term assets or investments are held by different investors for various purposes. For instance, an individual investor can buy medium-term bonds to cater for expenses that might occur in the immediate future such as paying children's school fees, buying a property, starting a business and other reasons. Also, stock traders have a different yardstick for measuring what position qualifies as medium-term, for instance, an investor who holds a position for a week can consider holding a position for a month as a medium-term position. This is to say that there is no strict measurement of the time horizon or investment duration that make a medium-term. In real estate, for example, properties held for less than 10 years can be tagged medium-term assets.
Risk Tolerance, Return Rates and Term Lengths
Term lengths for short, medium and long assets are considerably flexible. For instance, assets held for a duration below three years are often called short-term, while 3 to 10 is medium term; and 10 years or more is long term. The risk tolerance of investment varies, and it depends on how quickly an investor seeks to access the initial capital. While short-term investments have higher risks, long-term investments have lower risks. Return rates of investments or assets are also determined by the type of assets, maturity date and sometimes other factors such as market forces. However, medium-term investments are known to strike a balance between risk and return.