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Long Term Investments : Benefits Explained

Posted on 27-May-2024

6 min read

What is a long-term investment? Staying invested in mutual funds and other schemes for a long duration, right? Let’s learn all about it in this article by Shriram AMC.

Table of Content

Whether you invest in direct stocks or a few mutual funds of your choice, one of the best ways to ride out market fluctuations and earn high returns is by staying invested for the long haul. 

Panic selling when the stock prices fall, or your portfolio doesn’t earn you the kind of returns you had imagined only results in incurring losses in the long run. And that is why you’ll always find investment experts worth their salt advising you to invest money for the long term.

On that note, let’s delve deeper into the subject of long-term investments and understand what kind of avenues we have ahead of us that can help us build wealth and save taxes.

What is a Long-Term Investment?

A long-term investment is an asset you acquire with the intention of holding it for an extended period, typically exceeding three or five years. This timeframe allows you to weather market fluctuations and ride out short-term dips, focusing on the overall growth potential of your investment.

If you can vouch for your patience as an investor, we’d suggest staying put and waiting for your investments to reap profits. Here are some of the most common long-term investment vehicles:

•    Stocks: These are shares in publicly traded companies that can appreciate in value over time, offering capital gains when sold.

•    Bonds: Bonds are loans you provide to governments or corporations, offering a fixed interest rate payout during the holding period and the return of your principal amount at maturity.

•    Real Estate: Real estate investment is owning property that can generate rental income and potentially increase in value over time. This is less liquid compared to the others on the list.

•    Mutual Funds: Mutual funds are professionally managed baskets of stocks, bonds, or a combination of both, offering diversification and expertise.

What Are the Benefits of Long-Term Investments?

Long-term investing offers a multitude of advantages over short-term strategies. Here's why it's a compelling approach for building wealth:

1.    Time in the Market vs. Timing the Market

The stock market experiences ups and downs, but history shows a long-term upward trend. By staying invested for the long haul, you benefit from this overall growth, even if there are periods of volatility. Trying to time the market and jump in and out based on short-term predictions can be risky and often leads to missed gains.

2.    Compounding

This is the magic of long-term investing. Reinvesting your earnings allows your returns to grow on top of your initial investment, accelerating your wealth creation. The longer you're invested; the more compounding works its wonders.

3.    Reduced Risk

Short-term market fluctuations can be nerve-wracking. Long-term investing smoothens out these bumps, as temporary dips tend to even out over time. You're less likely to make impulsive decisions based on market noise and can focus on your long-term goals.

4.    Peace of Mind

Knowing your investments have a long runway allows for a calmer approach. You can avoid the stress of constantly monitoring the market and focus on other aspects of your financial plan.

How Do Long-Term Investments Work?

Let's take long-term mutual funds as an example. When you invest in a mutual fund from an AMC like Shriram AMC, you're essentially pooling your money with other investors. The AMC's fund manager then uses this combined capital to invest in a diversified portfolio of stocks, bonds, or a mix of both, aligned with the fund's objective.

These funds are designed with long-term goals in mind. The fund manager employs a strategic asset allocation, balancing growth potential with risk tolerance. This diversification helps mitigate risk, as a downturn in one asset class can be offset by gains in another.

Over time, as the underlying assets in the fund appreciate in value, the Net Asset Value (NAV) of the mutual fund increases. You can either choose to reinvest your earnings (dividends or capital gains) within the fund for further compounding, or you can redeem your units at the prevailing NAV to access your capital.

Best Options for Long-Term Mutual Fund Investments

There are innumerable options for long-term investments in the market, but we are going to limit ourselves to mutual funds for this discussion. Some popular options in this regard include:

•    Equity Funds: These funds invest primarily in stocks of companies with high growth potential. They are ideal for investors seeking capital appreciation over the long term and comfortable with a higher risk profile.

•    Debt Funds: Debt funds invest primarily in bonds, offering regular income and capital preservation. They are suitable for investors seeking stability and income generation.

•    Balanced Funds: As the name suggests, balanced funds maintain a balanced mix of equity and debt instruments, providing a combination of growth potential and income. They are a good option for investors seeking a balance between risk and return.

•    Hybrid Funds: Hybrid funds offer more flexibility, with the fund manager having the freedom to invest across asset classes based on market conditions. They are suitable for investors seeking a dynamic approach with the potential for higher returns.

Based on the type of investor you think you are, choose from one of these or more options to build wealth.

What are the Risks Associated with Long-Term Investments?

While long-term investing offers significant advantages, it's essential to be aware of the potential risks involved:

•    Market Volatility: Even with a long-term perspective, the stock market can experience significant fluctuations. The value of your investments can go down in the short term, which can be unnerving.

•    Inflation Risk: Over time, inflation erodes the purchasing power of your money. While long-term investments have the potential to outpace inflation, it's crucial to choose options that historically tend to keep pace with rising prices.

•    Company/Industry Risk: Specific companies or entire industries can face challenges that negatively impact their stock prices. Diversification across sectors and asset classes helps mitigate this risk.

•    Investment Horizon Risk: Unexpected circumstances might necessitate accessing your invested funds before your intended long-term timeframe. Some investments may come with lock-in periods or penalties for early withdrawal.

Tips to Invest in Long-Term Investments with Mutual Funds

Here are some valuable tips to get you started with long-term investing:

•    Define Your Goals: The foundation of any investment strategy is having clear goals. What are you saving for? Retirement, a child's education, or a dream vacation? Knowing your goals will determine your investment horizon (how long you can stay invested) and risk tolerance (how much volatility you can stomach).

•    Understand Your Risk Tolerance: Not everyone is comfortable with the same level of risk. Evaluate your risk tolerance honestly. Are you willing to accept short-term losses for the potential of higher long-term gains? This will help you choose suitable investments.

•    Start Early and Invest Regularly: The power of compounding works wonders over time. Even small amounts invested early can grow significantly. Consider setting up automatic contributions to ensure consistent investing.

•    Diversification is Key: Don't put all your eggs in one basket. Spread your investments across different asset classes. This could include stocks, bonds, real estate (directly or through REITs), and commodities. Diversification helps mitigate risk, as a downturn in one asset class can be offset by gains in another.

•    Do Your Research: Before investing in anything, educate yourself. Understand the asset class, the specific investment option, and the associated risks and potential returns. Reliable sources like financial news outlets, government agencies, and investment firms can be helpful.

•    Beware of Short-Term Emotions: The market experiences ups and downs. Don't panic sell during downturns. Stay focused on your long-term goals and avoid making impulsive decisions based on short-term fluctuations.

•    Rebalance Periodically: Over time, the weightings of different asset classes in your portfolio may shift due to market movements. Rebalancing involves adjusting your holdings to maintain your target asset allocation and risk profile.

•    Be Patient: Long-term investing is about building wealth gradually over time. Don't expect to get rich quick. Patience and discipline are key to achieving your long-term financial goals.

•    Review and Adapt: The financial landscape and your personal circumstances can change. Regularly review your investment strategy and make adjustments as needed to align with your evolving goals and risk tolerance.

•    Seek Professional Guidance (Optional): Consider consulting a qualified financial advisor for personalized advice tailored to your specific situation. They can help you create a comprehensive investment plan and guide you through the process.

Final Words

Consulting a financial advisor can help you choose the most suitable long-term mutual funds and other investment options based on your risk tolerance, investment horizon, and financial goals.
By embracing long-term investing with well-chosen and reputed asset management companies like Shriram AMC, you can harness the power of compounding, ride out market volatility, and pave the way for a secure financial future. 

Let's embark on this journey together!

FAQs

Here are a few commonly asked questions about long-term investments:

1.    How much money do I need to start long-term investing with mutual funds?

The beauty of mutual funds is that you can begin with a relatively small amount. Many AMCs offer Systematic Investment Plans (SIPs) that allow you to invest a fixed sum regularly, even if it's a small amount. This instils discipline and leverages the power of compounding over time.

2.    What if the market crashes during my long-term investment?

Market downturns are inevitable. However, history suggests that the market recovers and continues its upward trend over the long term. By staying invested, you ride out the temporary dips and benefit from overall growth.

3.    Do I need to rebalance my mutual fund portfolio regularly?

Yes, periodic rebalancing is recommended to maintain your desired asset allocation. As market conditions change, the weightings of different asset classes within your mutual fund might deviate from your target. Rebalancing helps you stay on track with your long-term investment strategy.

4.    What are the tax implications of long-term mutual fund investments?

Equity funds held for over one-year benefit from Long-Term Capital Gains (LTCG) tax, with lower tax rates compared to short-term gains. Debt funds also have varying tax implications depending on the holding period. Consulting a tax advisor can help you understand the specific tax treatment of your mutual fund investments.

5.    How can I stay disciplined and avoid checking my investments constantly?

Set up automatic investments and avoid checking your portfolio daily. Focus on your long-term goals and resist the urge to react impulsively to short-term market fluctuations.

 

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