6 MinsDec 28, 2021
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” - Paul Samuelson. This quote by America’s first Nobel laureate in Economic sciences speaks volumes
about the kind of temperament it takes for long-term investing in equity and equity-linked instruments.
Legendary investor Warren Buffett advocates this approach when investing for the long-term: “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”.
The Indian equity market has witnessed so many ups and downs with positive and negative undercurrents in the past several years. But the journey of the S&P BSE Sensex from its base of 100 points (in 1978-79) to around 60,000 points now, is
a vindication of the benefit of investing in equities for the long term.
It is important not to get carried away by exuberance in the euphoric phase of the market. Likewise, no point in panicking and disinvesting when the market hits turbulence, as long as you hold a robust and appropriate investment portfolio which
is suitable to your risk profile, long term strategic asset allocation and your investment objectives.
Some of the most successful equity investors such as Benjamin Graham, John Templeton, Warren Buffett, Peter Lynch, and our very own big bull, Rakesh Jhunjunwala follow a long-term investment strategy.
What is Long-Term Investing?
- Long-term investing is a buy-and-hold strategy that works well in the case of equity investments.
- The objective here is to not make money from small price movements by speculating over the short term.
- Periods of 5 years, 10 years and more are typically considered long-term
- Avoid attempting to time the market in the short term. Instead, focus on ‘time in the market’.
Also Read: [5 Things You Need to Know About SIP Investments]
Five benefits of making long-term investments:
1. Potentially earns higher returns – With a longer investment horizon, the power of compounding would work in your favour and the interim volatility may be evened out. Take the case of two friends, Raju and Sanju.
Both started a monthly SIP of Rs 10,000 in large-cap equity mutual funds; Raju was 30 years of age and Sanju was 35. Both continued their SIPs until their retirement at 60 years. Raju with a longer
investment tenure of 30 years was able to build a corpus of Rs 3.53 crore, while Sanju was able to build a corpus of approximately Rs 1.90 crore in 25 years.
|Age at the time of starting monthly SIP (Years)||30||35|
|Retirement age (Years)||60||60|
|Investment tenure (years)||30||25|
|Monthly SIP (in Rupees)||10,000||10,000|
|SIP Returns* (XIRR p.a.)||12%||12%|
|Corpus Built (in Rupees)||34,949,641||18,788,466|
*An XIRR of 12% p.a. assumed in case of a large-cap fund
For illustrative purposes only
It is not always possible that you may build stupendous wealth over a short period. Hence, you must give enough time for investments to grow. And if you have made good returns, do not expect the same result at all times.
2. Help in risk mitigation – When you have a short investment horizon, there could be risk of capital erosion, owing to the negative undercurrents at play. However, over the long term with favourable tailwinds and macro-economic
conditions, your market-linked investments may have the potential to grow.
3. Allows you to correct mistakes – The long-term investment strategy offers us the chance to learn from our investment mistakes and seek a course correction. This does not mean you should exit the investment if it
fails to perform in the short or medium term. Rectify the mistake if the underlying fundamentals do not justify holding onto the investment. If you own fundamentally robust investments, continue to hold them for the long-term and these may
4. Helps to keep emotions at bay – In the past one-and-a-half years or so, investors in the equity market have been through a roller coaster of emotions ––from fear and panic at the start of the COVID-19
pandemic to the euphoria of the markets peaking to an all-time high this year. Downturns can be dreadful, but the key is to manage your negative emotions well and one may consider buying at such corrections. Similarly, in an upturn, don’t
get swayed if you make good gains. Instead, follow the sensible approach wherein you book profits and shift the gains to some other suitable classes, viz. debt and goldRe-aligning to your long term asset allocation basis the risk profile by
buying or selling at the toughs or peaks at the market respectively is the key to long term investing.
The equity market is inherently volatile. Don’t make investment decisions based on your emotional state. Pay attention to fundamentals, select funds based on your risk profile, and focus on achieving your financial goals.
5. Offers tax advantages – When you constantly make buy and sell investment decisions, there are tax implications. As per current tax laws, you have to pay 10% Long-Term Capital Gains Tax if your gains are more than
Rs 1 lakh andthe holding period is more than 12 months. As opposed to this, if you sell within one year, you have to pay 15% Short-Term Capital Gains Tax. So, invest sensibly for the long-term whereby you pay less tax.
Patience is a virtue! So, be a marathoner and not a sprint runner. A Systematic Investment Plans in equity-oriented mutual funds will
infuse the good habit of investing regularly (daily, monthly, or quarterly), investing systematically will instil investment discipline; make timing the market irrelevant. It may also help mitigate volatility with the inherent rupee-cost averaging
feature; will be light on your wallet, and serve to be an effective medium to compound money and achieve your envisioned financial goals.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.