Long Term Investment Approach in Equity Market: What is It?

Don’t we all envy the people who picked up Reliance Industries stock way back in 1977 at a face value of Rs 10 a share?At the time of writing this blog, in July 2023, that same stock was worth more than Rs. 2,600. That works out to a rise of about 26,000% in the value of the stock over a 45-year period. If there ever was a winner in the Indian stockmarkets, the Reliance Industries share was it.But guess what celebrity investor Warren Buffett says is as important as being able to spot a winner or choosing the right stock? According to him, it is the ability to be patient as an investor.For long, Buffett has stressed on the need for patience when investing. His take on the issue: “Someone's sitting in the shade today because someone planted a tree a long time ago.”That, in essence, is what long-term investment is all about. A trader makes profits on price volatility, while long-term investors are willing to go the distance; they look for fundamentally strong companies to invest in, and stick with it over a long period. Unlike trading, it requires patience.In this article, we will cover the important factors to consider in the long-term investment approach and its benefits.

Before jumping into long-term investment tips, let's first understand how long-term investments are defined.An investment is considered long term when it is held for an extended period, typically for more than one year. The exact duration may vary depending on the financial regulations and tax laws of a specific country. In many countries, including India and the United States, holding an investment for more than one year qualifies it for long-term capital gains tax treatment, which often comes with lower tax rates than short-term capital gains.Long-term investments are generally associated with higher potential returns, as they allow investors to benefit from compounding over time. Investing long term also provides increased security as it also helps investors ride out any volatility the market may be momentarily facing.

Before getting into long-term investing, set financial goals and split them in three broad groups: short-term, medium-term, and long-term.For the first set of goals, set a time horizon of six months to a year, and for the second, plan a horizon of about three to five years, and for your long-term goals, let it be anything above 10 years .Once you are clear in your mind about these goals, you can also work out the costs. Your long-term investments will be geared at achieving your long-term goals; to reach those objectives, you may follow the five tips listed below.

1. Save regularly

This is the most important part about long-term investment planning: You must develop a habit of saving regularly, and making sure you stick to this habit all through your investment tenure.For this, you need to be disciplined. This way, you increase your chances of building up a substantial corpus over the years. As Buffett says, long-term investments call for patience; disciplined saving on a regular basis is part of that.

2. Begin early

However, to get the best results out of this strategy, you must start the process of saving and investing early in your life. This will not only instil financial discipline in you, it will also enable you to tap into the power of compounding, which helps to accumulate a larger corpus (i.e. create wealth).Let us understand how. Say you are 25 years old, and start investing Rs 5,000 every month in a systematic investment plan (SIP) that offers 10% returns; your target is to retire at the age of 60 years. At the end of 35 years, thanks to compounding, your corpus is a little over Rs 1.91 crore (Rs 1,91, 41,344). However, if you begin investing at the age of 30, i.e. delaying the process by five years, your corpus will be about Rs 1.14 crore (Rs 1,13,96,627). In other words, your earnings go down by a little over Rs 77.44 lakh.This just shows that if begin early, you let your money grow more.

3. Choose long lock-ins

You can help yourself in building both financial discipline and patience by opting for investment options with a long lock-in period. With your money locked in, you cannot make premature withdrawals, forcing you stay invested. This allows compounding to come into play.In this connection, you may consider instruments such as the Public Provident Fund (PPF) and the National Pension System (NPS) ; both have long lock-ins – 15 years for PPF, and lock-in till you turn 60 in the case of NPS.Yes, PPF does allows early withdrawals subject to certain conditions, and this comes very handy in emergencies. But if you can avoid withdrawals, you gain in the long run.NPS does not allow any premature withdrawal before you turn 60. When you reach that age, you are allowed to withdraw up to 60% of the accumulated funds in a lump sum, and spend the remaining 40% to buy an annuity plan, which means you will now have a pension.You can consider ULIPs (unit-linked insurance plans); with these, you get the twin benefits of insurance and investment in one investment instrument that has a lock-in of five years. However, it is advisable to stay invested in ULIPS beyond five years to get the maximum benefit.

4. Invest in equities

Thinking long-term does not mean you give up on equity investments; yes, equities can be volatile, especially over short periods, but if you can stay invested over the long term, you cannot ignore their potential to deliver high returns that can beat inflation. That apart, equity investments also helps one to develop the patience to remain invested over long periods.If you are uncertain about managing choosing the right stocks or the risks that come with equity investments, you can invest in equity mutual funds. This would not only pass your investible amounts to a professional fund manager to handle, you can also diversify your portfolio if you choose funds belonging to different sectors, thus balancing risk.

5. Research well, ignore noise

Any investment requires research, but it becomes imperative when you invest in mutual funds; research well to identify funds with smart strategies. There are any number of financial websites available to compare the performance of two funds, based on various yardsticks. Che k those out, see for yourself which funds make smarter investment moves.Alongside, develop the art of shutting out the “market noises” – when everyone becomes an expert and start giving you tips; beware, this can lead you to act impulsively. For long-term investing, you need to look at the big picture, stay focussed on your goals Instead. Talk to your financial advisor, who understands these goals, for guidance.

Investment decisions play a pivotal role in shaping our financial future, and long-term investment offers a myriad advantages. Let us delve into these benefits:

1. Mitigating risk

Risk is an inherent aspect of investing, especially in volatile asset classes like equities. However, long-term investments have the advantage of averaging out risk over time. By riding out market fluctuations, you reduce the impact of short-term volatility and increase your chances of earning favourable returns. The longer your investment horizon, more the opportunities you have to recover from temporary market downturns and benefit from the overall upward trajectory of the market. Further by ensuring a quality-first investment approach in the long-term equity investment, you can significantly reduce the associated risks.

2. The Power of Compounding

By staying invested for the long term, compounding can lead to significant wealth creation and financial growth. This is because the return that is generated on your initial investment is re-invested along wiht your capital, letting you invest a higher overall amount in the market. This exponentially accelerates the rate at which you earn returns over the years, when invested for the long term. So, the longer you stay invested, the better!

3. Beating inflation

Long-term investments have the potential to beat inflation due to their ability to generate higher returns over time. As the value of money erodes due to inflation, investments that outpace inflation help preserve and increase the purchasing power of your money. Long-term investments, such as stocks, real estate, and mutual funds, historically have shown higher returns compared to inflation rates, allowing investors to grow their wealth and stay ahead of rising prices.

4. Lower transactional costs

Long-term investments come with the added benefit of lower transactional expenses. Unlike short-term investments that incur multiple transaction costs, long-term strategies minimize brokerage and compliance fees, ultimately maximizing your profitability. By reducing the frequency of buying and selling securities, you save on transaction fees, allowing a larger portion of your investments to grow and compound over the long run.

5. Peace of mind

Long-term investors can find solace in the face of market fluctuations. Rather than being swayed by short-term market noise, they maintain a steadfast approach, allowing for greater peace of mind and avoiding hasty and ill-informed investment decisions. Long-term investment strategies are built on a foundation of patience, discipline, and a focus on the bigger picture. This enables you to stay committed to your goals, ride out short-term market volatility, and make rational decisions based on long-term prospects.

6. Tax savings

The returns you earn from your investments are categorised as long term capital gains (LTCG) and short term capital gains (STCG). Both the categories are taxed differently for equity as well debt investments. LTCG offers you better tax rates than STCG, giving you a chance to save more over time.

7. Recovery and learning

Even if short-term volatility leads to temporary setbacks, long-term investments provide ample time for recovery. Market downturns are a natural part of the investment journey, but by staying invested over the long run, you allow your investments the opportunity to bounce back and regain lost value. Sometimes following a trending approach in adverse times can provide you with the safety net to ensure a faster recovery. Moreover, long-term investments serve as valuable learning experiences. It helps you analyze portfolio performance, understand market trends, and make adjustments in the strategies, ultimately making you more prudent and informed investors.

Long-term investment offers numerous advantages that can shape your financial future. By considering key factors such as your investment time horizon and potential risks, you can make informed decisions and navigate the equity market more effectively.Patience is a vital attribute in long-term investing, as it allows you to weather market volatility, seize opportunities, and stay on track toward your financial goals. The power of compounding further enhances long-term returns, providing exponential growth and wealth accumulation over time.By mitigating risk, minimizing transactional costs, gaining peace of mind, and having ample time for recovery and learning, long-term investments pave the way for a secure and prosperous financial journey.