Investors are not just concerned about the assets they invest in but also the time period. And rightfully so. Time-period of an investment can significantly impact the returns it generates. Long-term investing as a strategy is often debated against short-term investing. Let’s read all about long-term investments, their benefits and more.
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What are long-term investments?
Long-term investments consist of assets that an individual or a company wants to hold for a longer span, like 3, 5, or 10 yrs. The plans could involve investing in instruments such as real estate, stock, gold, mutual funds, and securities. This is because these assets do not have the feature of generating instant returns. They are likely to return and appreciate better in the long term.
Although the prices of most assets rise and occasionally fall, staying in the market for the long haul can compound your money. In short, long-term investments demand patience on your end as an investor. This patience is a tool for bargaining for potentially higher returns and/or lower possible risks.
Return on equity: Highlights
- Investments made for a tenure of more than 3 yrs qualify as long-term investments.
- These investments can help beat inflation and compound returns. However, they can lock in your funds and prevent diversification.
- Long-term investments can offer tax benefits.
Benefits of long-term investments
- Protection against short-term volatility
Whether you choose stocks, gold, or mutual funds, the market is constantly volatile with fluctuations and short-term movements. You can safeguard yourself from this volatility and the risk of losing a large chunk of money by investing for a longer duration.
This long-term horizon investing strategy can help you identify and surpass the risks and reap the benefits of compounding returns.
- Reduces the risk quotient
Investment and risk are closely associated. Any investment involves a certain degree of risk, no matter how big or small. However, the benefit is that the risks are averaged out over time when you stay invested for many years.
- Opportunity to leverage compounding interest
Compounding interest has consistently shown to work in favour of investors. Long-term investment options enable you to reap the benefits of compounding, as you not only grow your money at a faster rate and earn returns on those investments, but you also make money on those returns towards the end of every compounding period.
- Helps plan for future financial goals
Long-term investment plans can help cater to all future expenses and financial obligations, such as a child’s education or marriage, retirement, vehicle, or house. Since long-term investments demand discipline towards saving, they help investors take charge of their financial future.
- Prevents unnecessary stress
Unlike short-term investments, long-term investment plans do not require constant monitoring and market tracking. This prevents unnecessary stress regarding market fluctuations. So, if you want to make the most of your investments, it is crucial to adopt a long-term approach.
Disadvantages of long-term investments
Factor in the following disadvantages when considering making long-term investments:
- Locks your investment
When you think of long-term investment plans, it essentially means that your corpus will be locked in for a long period, even decades. You may miss out on potential short-term opportunities.
- Lack of flexibility to explore other instruments
You are likely to pick the best long-term investment plans to not withdraw those funds anytime in the near future. Now, this can limit your exposure, preventing diversification.
How to plan long-term Investments?
Whether you want to accumulate money for your child’s higher education, build a substantial retirement corpus, or want to beat inflation, long-term investment is the way out. Here is how to do so:
- Start investing early
As long-term investments demand discipline and patience, it is ideal to start early. The sooner you start, the better your returns compound. This will also help you amass a larger corpus. An early start gives your money time to grow and enables you to counter inflation.
- Identify your financial goals
Before mapping your long-term investing plan, have an all-rounded view of your financial goals. Split your goals into three buckets – short, medium, and long. Based on the goals and tenure for which you wish to invest, divide the money you will need to invest to accomplish them. These buckets could range from financing education, investing in a business, retirement, and more.
- Diversify
When investing long-term, you cannot rely solely on one financial instrument.
Diversifying your investments across different asset classes – gold, equities, and bonds- is important. In fact, you must diversify within an asset class also. For instance, with equities, you can spread your investments across small-cap, mid-cap, and large-cap funds. Diversification will balance the risk quotient, stabilise your portfolio, and help you gain rewards.
What are the tax benefits from long-term investments?
Besides compounded returns, long-term investments provide reduced tax liability. Take equities, for example. Here the long-term capital gains are taxable at comparatively lower rates than short-term gains.
Long-term capital gains are taxed at 20%, whereas short-term capital gains hover around 15% +charges and cess as applicable. All in all, long-term capital gains tax can offer better tax savings if compared to short-term capital gains tax.
Example of long-term investment
Property is an excellent example of a long-term investment.
Let us assume a manufacturer wants to expand his business and is looking for a factory. He purchases land spread across 400 acres. They use 100 acres of it for parking lots and inventory. The manufacturer keeps the remaining 300 acres of land unused and intends to sell it to another manufacturer looking for a space. This, technically, then becomes a long-term investment and not an asset. The 100 acres leveraged for business purposes can be a long-term asset.
Investing in equities also over time can be counted under long-term investments. Here, you have a good chance of generating multi-bagger returns.
Conclusion
Long-term investments require a considerable amount of commitment at the investor’s end. By the end of a long period, investors can achieve their goals and withdraw their long-term investments. Long-term investing can help reduce risk and beat inflation. It can also ride over short-term fluctuations. A long-term corpus can fulfil your future financial needs if done right.
