Investing your money for the long term is an effective method of achieving your bigger life goals. This approach is particularly relevant for investors who chase long-term goals such as retirement planning, buying a house, foreign education of their children and other bigger goals that require higher amount of money.

Often short to mid-term investment is what people look at as they want to reap the benefits in the short term. However, there are many people who consistently invest a small amount from early age and by the time they grow old, their corpus gets bigger to help them fulfil their financial requirements.

Why is a long-term investment important for everyone? Let’s understand why you must focus on long-term investments and benefits they may offer.

Understanding Long-Term Investment

Long-term investment refers to committing funds to financial assets with the expectation of holding them for an extended period, typically several years or even decades. The primary goal is to build wealth, generate passive income, and achieve financial objectives over time. This approach has gained popularity due to several reasons — inflation and rising cost of living is one of them.

Also Read: 10 things investors should check before investing in mutual funds

Compounding Returns

Compounding is a fundamental principle in long-term investing. When you invest for the long term, your returns can generate additional earnings on the initial investment, as well as on the returns themselves. This compounding effect can significantly boost the growth of your investments over time, leading to exponential wealth creation.

For instance, consider a scenario where you invest in a diversified portfolio of stocks or mutual funds. Over the years, the returns earned on your investments get reinvested, leading to substantial wealth accumulation. That is why, compounding can be a potent wealth-building tool.

Adhil Shetty, CEO, Bankbazaar.com, says, “One of the most important lessons in investment is that of the power of compounding. The power of compounding can be easily understood. For beginners, it might not be easy to comprehend. So let us look at another example.

“Suppose you invest Rs 10,000 a month in an investment plan that gives you an average of 12 per cent returns for 10 years. You invest Rs 12 lakh this way. Thanks to the returns, you will end up with Rs 23.23 lakh after 10 years. This is the power of compounding.”

Market Volatility

You must know that short-term fluctuations can be unsettling, leading to impulsive decisions that may result in losses. Long-term investors, on the other hand, can ride out these market ups and downs with a more resilient perspective. By maintaining a long-term horizon, investors are less affected by short-term market volatility and can stay focused on their financial objectives.

Meeting Your Goals

Making long-term investments is particularly suited for achieving major financial goals, such as retirement planning, buying a home and funding higher education etc. The longer term allows investors to systematically accumulate wealth and work towards these goals without the pressure of immediate returns. For instance, long-term investments in instruments like Employee Provident Fund (EPF) and Public Provident Fund (PPF) can help build a substantial retirement corpus.

Tax Benefits

Several long-term investment options come with attractive tax benefits. For instance, investments in Equity-Linked Savings Schemes (ELSS) qualify for a tax deduction under Section 80C of the Income Tax Act. Additionally, long-term capital gains on certain investments, like equity shares and equity mutual funds, are taxed at a lower rate compared to short-term gains.

By utilising tax-saving investments, you can not only create wealth over the long term but also reduce tax liabilities.

Inflation Hedge

Inflation erodes investment over time. Long-term investments act as a hedge against inflation by providing the potential for higher returns than traditional savings accounts or fixed deposits. Investing in assets like equities, mutual funds, government schemes such as PPF and EPF can help beat inflation.

Long-term investment is not just about financial planning; it’s about securing your dreams. That is why you must focus on long-term investment planning to meet goals that would require higher capital investment.