The strategies followed for long-term investing are different from the ones for short-term investing. Here is how to make the most of your long-term investments.
Despite the imposition of LTCG tax @10% on equity gains of Rs 1 lakh and above booked in a financial year, equity is still the best asset class to achieve financial goals with time horizons of 5 years and above.
The strategies followed for long-term investing are different from the ones for short-term investing. Some asset classes deliver better risk-adjusted returns over the long than those usually doing well during the short term. Long-term investment horizons also allow the investors to take greater risk as longer time horizons allow investors more time to recover from their mistakes and losses. On the contrary, short-term investment horizons require higher emphasis on capital preservation and income certainty.
Here are some tips to make the most of your long-term investments:
1. Align your investments with clearly set financial goals
Every long-term investment that you make should have a life goal associated with it. Doing so will give you a clear estimate of the size of your financial goals and the time required to achieve them. A clearly set goal with a defined time horizon would let you to find out the monthly contribution required for creating the corpuses, set an asset allocation strategy for each of them and help in making security selection. With all this information in hand, you can easily decide your fund flows to each of your short-term and long-term financial goals depending on your priorities.
2. Start investing early
Starting early inculcates financial discipline and assists you to benefit from the power of compounding. Due to the power of compounding, the gains generated from your investment start to generate returns on their own, thereby yielding a bigger corpus over the long run with much lower investment contributions. For example, a 26-year old would require a monthly SIP contribution of Rs 3,500 to build a retirement corpus of Rs 2 crore by the time he turns 60, assuming an annualized return of 12% p.a. However, if he starts his equity fund SIPs 10 years later at the age of 36 years to build a retirement corpus of the same size, then he would need a monthly SIP contribution of Rs 12,000 assuming the same rate of annualised return.
3. Invest in equity funds
Despite the imposition of LTCG tax @10% on equity gains of Rs 1 lakh and above booked in a financial year, equity is still the best asset class to achieve financial goals with time horizons of 5 years and above. While volatile in the short term, equity as an asset class has mostly outperformed fixed income asset class and inflation over the long term by a wide margin.
The best instrument available to retail investors to benefit from equity is to invest in equity funds. Equity funds offer their investors the key benefits of professional fund management, adequate diversification and investment convenience at a very low cost. Those with taxable income can also invest in ELSS funds, popularly known as tax-saving mutual funds, to save income tax under the Section 80C.
4. Opt for the SIP mode
Investors lacking the skill to time their investments should opt for the SIP route while investing in equity funds. Taking the SIP route also helps in ensuring regular investment, averaging their investments during market corrections and instilling financial discipline among the investors. With ticket size of most equity fund SIPs being as low as Rs 1,000 (Rs 500 in case of ELSS funds), even investors with limited monthly surpluses can derive the benefits of investing in equity asset class through equity mutual funds.
Investors should also try to top up their SIPs with lump sum investments during steep market corrections and bearish market phases like the one witnessed during the months of March and April this year. Doing so would allow them to average their investment cost at much lower levels and thereby, can help them in reaching their financial goals sooner.
5. Avoid compromising your emergency fund
While you continue investing for the long term, ensure you build an emergency fund big enough to meet your mandatory monthly expenses of at least 6 months. These mandatory expenses should include your daily living expenses, utility bills, insurance premiums, tuition fees of your children, EMIs, rent, contribution to your crucial financial goals, etc. Without an adequate emergency fund in place, any unforeseen financial emergencies like job loss or loss of income due to disability would force you to sell your existing long-term investments to meet those expenditures. This would not only impact your long-term financial goals but may also lead you to sell your investments at loss in case any financial emergency strikes during bearish market conditions.
6. Review your investments at periodical intervals
Regular review of your funds’ performances is as crucial as regular investing in equity mutual funds. After all, even star funds with excellent returns in the past can remain laggards for a long time in the future. Thus, ensure to compare the returns generated by your existing funds over the past 1-year period with their benchmark indices and peer fund schemes at least once in a year. Redeem your existing funds for better performing ones if they have constantly under-performed over the last 3 years.