At a time when prices of goods and services keep sky-rocketing, it can become difficult to save enough to turn your dreams into reality. If you dream about higher education, buying a house, having a grand wedding, a vacation or tension-free retirement, but cannot afford these at this point in time, you must consider making your long-term investment plans now. Financial planners recommend long-term investment in equities as it helps investors plot out their future goals in a better way. Long-term investments have historically led to higher wealth creation and given investors a better investment experience. There are myriad benefits in investing for the long term:
In long-term investment, your returns are reinvested into your principal amount. Subsequently, your principal amount keeps growing year after year which allows your investment to multiply at a faster pace. The best way to benefit from compounding is to invest for the long term. The longer the tenure of investment, the greater will be the power of compounding.
More time to grow
The longer you invest, the more time you give your investment to grow. Investors may find it tempting to book profits when their investments grow or redeem when they are making losses. However, this is against the principle of long-term investing and would negate the benefits that can be accrued through compounded returns. Investors are best advised to stay patient through short-term peaks and troughs of the market to realise the true potential of their investments in the long run.
For instance, if you had invested `1 lakh in equities on April 30, 2016, your investment would have grown to `1.2 lakh after one year. On the other hand, if you had invested on April 30, 2002 (i.e., 15 years ago), the investment could have grown to `8.9 lakh (performance calculated on the basis of S&P BSE Sensex index’ levels). Thus you could have accumulated a sizable corpus over the long term.
You may also like to watch:
Resilient to volatility
The equity market is generally volatile over the short term. However, judicious long-term investment enables investors to reduce the risk of near-term volatility in prices.
Long-term investors should ideally have pre-requisite goals in mind and their decisions should be based on building a portfolio that will help them achieve those goals. Often, investors tend to take investment decisions based on market sentiments. Such investments can be susceptible to a higher amount of losses. While a bad year in the market can spell doom for the short-term investor, a long-term investor can reverse losses by investing sensibly in successive years.
This investment approach also teaches us to be disciplined in our spending habit. Important life lessons such as patience and the ability to overcome short-term losses can be learned through long-term investments.
A legendary investor once said his favourite investment horizon is ‘forever’ and that one should never make an investment unless one plans to hold it for long-term. Investing over the long term is one of the smart ways to achieve your financial goals and the best time to start is now.
The writer is senior fund manager, equities, BNP Paribas Mutual Fund