How long is ‘long term’ when it comes to equity investing?

5 MinsMarch 04, 2020

If you are one of those who invest and redeem your equity investment, based on the market performance and returns clocked, then you are doing it wrong. When it comes to financial goals and investments, each investor has a different time horizon. This is usually a function of your asset allocation – which is defined as per your age, income & expenses, assets & liabilities, risk appetite, the financial goals being addressed, and the time in hand before goals befall. Read on to know how long is ‘long term’ when it comes to equity investing.

long term

It would be safe to say that for long-term financial goals a period over seven years could be considered as long-term. And equity as an asset class is an apt choice from an asset allocation standpoint. Having said that here are some common myths when it comes to long-term investing:

Myth#1: Long term may be uncertain and gains made may erode – Some of you may not believe in the idea of long-term investing. Instead, you may believe in taking money off the table, as soon as you make returns. The drawback of this strategy is that by not staying invested for a longer period your ability to clock better returns is clipped. That limits the potential to build a bigger corpus and accomplish your envisioned long-term financial goals comfortably.

Myth#2: It’s all about buying on low and selling high – Some investors believe in buying on lows and selling on highs when participating in equity markets over a longer period. But if timing the equity market was as simple, everyone would have become wealthy. The fact is that no one has been able to master this art with 100% precision. Even a good trader is good only until his/her last trade, as the future is unknown.

Hence, instead of timing the market, you should look at the margin of safety available and focus on ‘time in the market’. This would help in compounding hard-earned money and mitigate the risk involved in the journey of wealth creation.

Myth#3: Asset allocation is not needed for long-term investors – On the contrary, asset allocation is an effective strategy to diversify, optimise portfolio returns, minimise portfolio risk, and align investments based on financial goals being addressed. It makes timing the market irrelevant. For these reasons, asset allocation is the cornerstone of investing and should not be ignored.

Now that we have established that equity investment is the best way to realise your long-term financial goals, let us look at the best way to invest in equities. For individual investors, this is best achieved by investing in equity mutual funds and the optimal route is through Systematic Investment Plans (SIPs):

  • Do not make the mistake of stopping SIPs in a shorter time frame just because of the turbulence in the equity market and short-term underperformance of the mutual fund scheme.
  • Stay put, and continue with your wealth-creation journey as long as the mutual fund scheme you are investing in is amongst the suitable and best-performing one.
  • If you can, increase your SIP instalment amount regularly every year. Even a marginal annual increase in investment by 5%, could reap considerable benefits over the long run.
  • Plan for separate life goals. Natural as it is to have various aspirations, make sure you have provisions set aside for each of them. Allocating separate SIPs to separate life goals add to the power of compounding, helping you accomplish envisioned financial goals sooner, and counter inflation better.
  • That being said, the selection is the key amid a plethora of mutual fund schemes available. Want help to pick the best mutual funds to SIP? Click here. Align your investments to your financial goals and make your dreams come true.
  • Remember that the longer your investment time horizon, the better it is from a wealth creation standpoint. This is because the power of compounding (also known as the 8th wonder of the world) would then work better to your advantage with the volatility of the equity market mitigated.

Higher the SIP tenure, a bigger corpus is potentially built

Investment HorizonTotal Amount Invested (Rs)Current Value (Rs)XIRR Returns (%)
3 years360,000406,1867.95%
5 years600,000784,14410.61%
7 years840,0001,384,49013.99%
10 years1,200,0002,560,06814.47%

Also Read: [SIPs to Accomplish Your Financial Goals]

Data as of February 3, 2020

Monthly SIP of Rs 10,000 considered for calculation purpose. The SIP returns expressed are of multicap fund. 1st day of every month considered for SIP instalment amount and XIRR calculated accordingly.

*The above table is for illustrative purpose only.

Mutual funds Mutual Fund investments are subject to market risks, read all scheme related documents carefully. The past performance of the mutual funds is not necessarily indicative of the future performance of the schemes.

(Source: ACE MF)

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author 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

Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. *T&C apply