When you are investing in equity mutual funds, Stocks or other high risk-oriented investments like real-estate, one sage advice you often get to hear is that ‘invest for long-term’(or) have a ‘long term investment horizon’.
Almost all the investment related articles that you read and the programs you watch on TV, advice the investors to stay invested with an investment horizon of long-term.
Will investing for long-term definitely gives your decent returns? What are the benefits of investing with a long term investment horizon?
Let’s say you book a Fixed deposit or Recurring deposit for 10 years, will you get decent returns? Will the inflation/tax adjusted returns on your investment make you happy? No – am I right?
Inflation and taxes will eat away a major chunk of your returns. So, investing for long-term is just not good enough! Investing in right investment avenues is equally important. These avenues can be high risk-high reward ones, which can also give you an income which is tax-exempt.
Stocks (direct equity) and equity mutual funds can be your best investment bets for long-term financial goals. There is a high probability of getting decent inflation adjusted returns from these investment options and icing on the cake is ‘the long-term capital gains on investments like equity mutual funds and stocks’
are tax-free’ (LTCG on Stocks & Equity funds taxable @ 10% from FY 2018-19.) (Related Article : ‘10% LTCG Tax on sale of Stocks/Equity Mutual Funds | Budget 2018-19 Proposal‘)
Another investment which can give you decent investment returns is ‘real-estate properties’. But unlike, mutual funds / stocks, investing in property may not be suitable to everyone. Your investment in property can wipe out your life-long earnings, if you invest in say a property which has litigation.
In my view,
- One has to have the ability and willingness to take risk. In most of the circumstances, the willingness to take risk is more important than the ability to take the risk.
- Investing in RIGHT investment avenues for long-term is very important.
- Keep reviewing your investments once in a while. Invest with a conviction and stick to your investment plan.
- As the target goal year nears, you may have to gradually re-balance your long-term portfolio to safer investment avenues. (This is where I believe that investing in equity oriented balanced funds for medium/long-term goals.)
Let me give you two real-life examples of long-term investments. These two investments were made by my father during 1980s. (Kindly note that these examples are not for highlighting his/our family’s stock/investment picking skills but just to highlight the importance/benefits of long-term investing.)
Investment in Dhanuka Agritech Shares
My father had invested Rs 1,000 in Dhanuka Agritech’s IPO in 1986. He had applied for 100 shares and got the 100% allotment. (This is the only stock investment that my father had made.)
My father had expired in 1992, hence the shares have been transferred to my mother’s name in 1994. We, have been holding these shares since then…and now have 500 shares (including bonus shares).
We, as a family have a strong agricultural background. But, my father was a bank employee. During the initial years of his employment, though his risk taking ability was low, he had believed that a fertilizer company may do well in the years to come and hence invested in this fertilizer company for long-term (my mother says so..).
If we consider Rs 1,000 as the capital invested in 1986, at the current price of around Rs 680, the CAGR (Compounded Annual Growth Rate) works out as around 20.6% (excluding dividends and other calculations).
“Holding period = 31 years & Return on Investment = 20.6%“
(Dhanuka Agritech’s share price movement : 2011-2017)
Are we blindly holding on to these shares? – No. Every year (since 2002) my mother asks me two questions after the end of every financial year; i) Did we receive the dividend? & ii) Shall we hold on to these shares for one more FY?.. Personally, I have been tracking this stock and its performance (share price as well company’s) once in 6 months or in a FY. Also, added it to my ‘watch-list’ (on moneycontrol APP).
Real estate Investment
(Title Deed of the property written in Telugu language)
My father has also invested Rs 4,000 (market value) in a residential plot at Nandyal (a small town in Andhra pradesh), way back in 1984. The current value (unrealized) of this property is around Rs 20 Lakh, returns of around 20.7% (taxes have been ignored).
“Holding period = 33 years & Return on Investment = 20.7%“
Investments & Real-rate of Return
Which are the best investment options suitable for long-term investment?
Any investment option which you believe can give positive real rate of return (inflation & tax adjusted returns) can be considered for your long-term financial goals. Ex : Equity mutual Funds, Real estate property, Stocks/Shares etc.,
These are risky investment options, but you may have to take calculated risks to achieve desired corpus amount(s) for your long-term goals (7 to 10+ year goals).
As Mark Zuckerberg (Co-founder of Facebook) rightly says – ‘The biggest risk is not taking any risk… In a world that changing really quickly, the only strategy that is guaranteed to fail is not taking risks.’
Below chart gives you an idea about the inflation rate in India during the period from 1959 to 2016. The average inflation rate can be assumed at around 6-8%. So, ideally your long-term investments should give you returns of around 5-6% over and above the inflation rate.
You may kindly read my article on : What is Real rate of Return?
Benefits of investing for long-term & My observations
- Starting early and investing for long-term gives you time to hold and be patient with your investments.
- Long term investors with their eye out into the future usually ignore current market conditions, or at least, don’t obsess over them. They may tweak their portfolios a bit, but they don’t overreact to market movements.
- Except for the small proportion of people who have inherently inflation-linked lifelong income, everyone else may have to invest almost all their long-term investments in equity oriented securities.
- By staying invested for long-term, you may actually avoid making costly mistakes, and may benefit of any powerful bull rallies. You may also get the benefits of the Compounding factor.
- When you’re invested for the long term, your average return becomes much more stable over time and it’s less likely that you’ll lose money. Various studies show that as we lengthen our investment horizon, the average annual rate of return over that timeline becomes less variable.
Last but not the least, you need luck to be on your side to make decent profits with your investments. Nevertheless, ‘fortune favors the brave‘!
In Hindu mythology, the saying goes as ‘Dhairye Sahase Lakshmi‘, it means that courage and valor itself is Lakshmi. Take risk, invest with a conviction and have a long-term investment horizon. Cheers!
Continue reading :
- List of Best Investment options!
- What is Time Value of Money?
- Five important formulas to calculate Return on Investments
- 10 reasons to avoid Short-term trading in Stock Markets
(Image courtesy of Sira Anamwong at FreeDigitalPhotos.net) (References : inflation.eu & moneycontrol.com) (Post published on : 01-September-2017)