There is no dearth of financial literature on the benefits of long-term investing. In fact, from the Oracle of Omaha to most mutual fund managers, you will find everyone endorsing long-term investing with great vim. However, despite this, when markets take a turn and volatility gets enhanced, investors tend to forget their commitment to long-term investing and rush to exit their equity investments. Thus, there is always a need for a refresher dose.
Need to invest
Money is a medium of exchange which we use to buy everything from bread to Bentley. Buying a house, getting good education or experiencing a refreshing holiday all require money. We all work hard for money to fulfil our needs and desires. However, in order to ensure that we have accumulated enough money to meet our myriad goals, it is important that we invest. The money lying idle in our bank account seldom grows, while inflations erodes the value of this money. Investing is a key to not only protect our money from being spent on unnecessary purchases but also ensure that our hard earned money grows, making our monetary goals easily achievable.
Benefits of long-term Investing
Higher returns: the primary benefit of investing for the long-term is compounding. This is a mathematical process that ensures that over a period of time, both the principal invested and the subsequent earnings on the principal, earn interest. As the investment time horizon increases, these earnings can potentially multiply exponentially thereby, generating higher returns. Additionally, buying and selling of investments usually attracts transaction costs that can reduce the realised returns.
Smoothens volatility: when it comes to investing in stock markets, volatility generally tends to be a huge concern for investors. In the simplest form, volatility is the fluctuation in prices. In the short-term, a host of factors that are both fundamental and behavioural in nature, can impact stock prices. However, over the long-term, the volatility in prices smoothens out and the true fundamental value of an investment emerges.
Lower taxes: tax is the money paid from your income to the government. However, few long-term investment options such as PPF, ELSS allow deductions from your income to reduce the overall tax liability. There is also tax on short-term and long-term capital gains. The capital-gains tax on long-term equity and mutual fund investment is 10 per cent (tax is on gains above Rs 1,00,000 in a financial year) which is much lower than the 15 per cent capital-gains tax on short-term investments.
The current environment is highly uncertain and volatile. The first reaction of investors might be to quit and go home. However, it is important to stay disciplined and adhere to your long-term investment strategy to reap investment gains.