Long-Term Investment

Investments are goal-based. Many individuals choose to invest in short and medium-term goals, as long-term investments can seem daunting; due to the lack of instant gratification. However, investment advisors advise one of the best ways to secure your financial future is to choose long-term investment plans.

What is the meaning of long-term investments?

The tenure of the investment is determined based on the extent of the holding period. It is the number of years you want to stay invested in a specific instrument. However, due to the nature of taxation, different assets have been accorded different long-term holding periods. For instance, holding equities/stocks/shares for more than 1 year is a long-term investment. But, to qualify as a long-term investment, debt/fixed-income assets need to be held over 36 months or 3 years to qualify as a long-term investment.

How to plan for a long-term investment?

Long-term investment options should be planned as per personal goals, income, and return expectations from investments. For example, if you are in your 20s and are saving for retirement, one has 30-40 more years to build a financial corpus before you retire. But, if you are saving for your child’s marriage, you would need to save and invest for a relatively shorter investment term of, say, 20 to 25 years. Thus, investment plans vary according to tenure and goal.

7 Benefits of Long-Term Investments

Tax benefits

If one of your primary goals is tax savings, you can choose a long-term plan and regularly invest to avail of tax benefits as per Section 80C of the Income Tax Act, 1961. With a long-term investment, you get twin benefits of wealth creation and tax saving under one roof.

Lesser effect of market fluctuations

Investments are subjected to market risks. This means your investments can be affected whenever the market witnesses a high or a low point. When it comes to long-term investment, short-term changes do not tend to influence much, as the risk even out over the years.

More time to try different funds for maximum returns

When you have a long runway for growth, there are various routes you can choose from. In a long-term investment, you have enough time and opportunity to switch between different investment fund choices. With adequate time at disposal, any mishap or non-performing fund can easily be replaced without compromising too much with overall returns.

Security from short-term volatility

Unless you have a crystal ball, you cannot predict the future. While financial pundits can present you with assumptions and theories, you cannot get an accurate picture of how the market will move. However, over the years, you can have a reasonable understanding of where stocks may be in a few years, given the economic growth potential.

It is difficult to project market conditions accurately, and so to experience maximum benefits; you need to invest for the long term. You can easily sidestep short-term volatility by investing longer in long-term investment options.

Goal-centric planning

The long-term investment approach lets you save and invest for long-term goals. You can use long-term investment plans aimed at significant milestones such as home buying, education for children, building retirement corpus, and so on.

Convenience

Long-term investment plans need to be initiated and completed regularly. One good aspect of these investment plans is that you do not need to worry much about investment dates. With a one-time instruction to the bank, automated debits of the specified investment amount will be made. This eliminates the need for manual intervention or reminders. The designated bank account or debit/credit card will be debited on the chosen date. Enhancing convenience further, you can purchase long-term investment options online with a few clicks on a smartphone or computer.

Power of compounding

The more time you allot to investments to grow, the more chances of higher returns. A seemingly insignificant amount of Rs 500 invested each month for 25 years can create a corpus of over Rs 16 lakhs if returns annually are at 15 percent.

Common Long-Term Financial Goals or Objectives?

Common long-term financial goals or objectives include saving for a down payment on a house, funding your retirement, paying off large debts, funding your child’s higher education, paying for a major international vacation, etc.

These objectives can be conveniently achieved with long-term investment or long-term investment plans. All you need are good long-term investment options at your disposal.

LONG-TERM INVESTMENT IDEAS FOR TAX BENEFITS

Once you understand how long-term investments work, it is time to purchase good long-term investment plans to secure your financial goals and dreams. Tax benefits are a big draw for long-term investment ideas. Here are some time-tested suggestions.

Life insurance & Pension policies

These are said to be one of the popular long-term investment options. Life insurance plans and pension policies give you tax benefits thanks to Income Tax Act, 1961 provisions. You can get tax savings of over Rs 46,000 annually by investing Rs 1.5 lakh. These are long-term investment options, ideally more than 10 years plus.

ELSS

Equity Linked Saving Scheme or ELSS is a mutual fund type. This is a market-linked investment with no assurance of returns. These also get tax benefits under Section 80C of the Income Tax Act. You need to be invested for 3 years.

National Pension Scheme

The National Pension Scheme/System (NPS) falls under voluntary long-term investment plans. You can get tax benefits for investing Rs 50,000 each financial year under Section 80CCD in NPS. This is also a market-linked investment option.

ULIPs

Unit Linked Investment Plans (ULIPs) combine insurance with investment, thus giving you the best of both worlds. The insurance component offers guaranteed outcomes, while the investment portion can give market-linked return potential. ULIPs can also provide tax benefits under Section 80C of the Income Tax Act. You need to be invested for 5 years to avail of this benefit.

When to choose long-term investment above short-term investment?

The decision to go for long-term or short-term investment depends on your goals and risk profile. The short-term investment allows you to achieve any goals within a short span. However, they do tend to come with higher risks due to the fluctuations in the market.

Conversely, long-term investment avenues spread your risk over a longer period, thus reducing risk.

Frequently Asked Questions

What are the types of investment options for the long term?

One can consider long-term investment options such as a life insurance policy, pension/retirement policy, ULIP, NPS, ELSS, PPF, etc.

Are long-term investment plans safe?

Long-term investment plans offer safety regarding the return on the principal amount and returns generated.

Can you lose money in long-term investing?

While long-term investing tends to reduce the risk of loss considerably, compared to short-term investing, these investments can have a little risk of principal loss. The longer the tenure of long-term investment, the chances of risk reduces. Over long periods such as 10 years plus, the risk of losing money becomes almost negligible.

Are long-term investments riskier?

Long-term investments are considered to be less risky than short-term investments. The longer the tenure of the investment, the lower is risk associated with it.

What are the disadvantages of long-term investments?

Long-term investments require long-term commitment and discipline. Some investors also may lack the patience to wait for investments to deliver returns. These are not disadvantages of long-term investments but rather investor behaviour.