Planting Seeds for a Prosperous Future: The Power of Long-Term Investing
If your goal is to maximise your wealth, investing for the long term is one of the best ways to achieve it. This is because long-term investing offers a host of unique benefits that are designed to effectively tackle multiple short-term issues like market volatility and investment risks. Let’s take a closer look at the key advantages of long-term investing.
The Advantages of Long-Term Investing
Here are 5 distinct benefits that you get to enjoy when you invest in a long-term investment scheme.
Increased Return on Your Investments
Most long-term investment schemes utilise a concept known as compounding, which has the potential to increase your returns significantly. Compounding is when you reinvest the return you get from an investment. This leads to a cascading effect where your returns start generating returns of their own. When this is carried out for a sufficiently long period, your investment starts generating exponentially higher returns.
Reduced Impact of Market Volatility
The equity market is cyclical and unpredictable. As time passes, it is bound to go through various ups and downs. In financial parlance, such market ups and downs are termed volatility. That said, market volatility can be a problem if you invest for the short term. When you stay invested for a sufficiently long time, however, you will find that volatility may slowly even out, producing returns that may be higher than most short-term investment schemes.
Opportunity to Invest According to Your Means
One of the best advantages of long-term investing is that you get the freedom to invest according to your financial position, while still having the opportunity to achieve your goals. For instance, if you have a large amount of investment capital at your disposal, you could invest a lump sum amount in an investment scheme and wait till it matures.
Alternatively, if you’re limited by the amount of capital that you can invest, you can consider investing small sums regularly over the chosen tenure. Although a few short-term investments do offer such kind of flexibility, the returns may not be comparable with what you get with long-term investing.
Lowered Overall Cost of Investment
In the case of mutual fund investment schemes, you have the option to invest via a Systematic Investment Plan (SIP). Here, you invest small sums regularly over a long tenure. When you purchase fund units during both rising and falling market scenarios, your cost of investment averages out over the long term. This phenomenon is known as rupee cost averaging, and it can effectively bring down the cost of your investment, thus maximizing the returns.
Many long-term investments give you the advantage of consistent tax savings. In the case of life insurance savings plans, for instance, the premiums you pay each year are tax-deductible up to Rs. 1.5 lakhs each year. Also, the maturity amount on plans issued after April 01, 2023, is completely tax-free as long as the annual premiums are below Rs. 5 lakhs. As you can see, by staying invested for the long term, you can effectively reduce your tax liability.
In a similar manner, many other investments offer annual tax-saving benefits. By including such options in your long-term investment plan, you can continue to save taxes throughout your working years.
The bottom line is that in India, there are multiple investment schemes that can help create wealth over the long term. Stocks, mutual funds, life insurance savings plans, and government-backed savings schemes are a few options that you can consider if you’re looking for long-term wealth creation. That said, before you choose an investment option; remember to make sure that it aligns with your financial goals and your risk profile.
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ARN - ED/06/23/2398
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