Many investors plan their investments based on future goals, which is when they make long-term investments. Long-term investments often yield greater returns than short-term investments and are less riskier as well. Equity markets are never stable and don’t always drive in one direction. Therefore, chasing short-term returns may not be the best approach to effective wealth generation.
Long-term investments average out the volatility of a market and end up generating better returns as the tenure increases. However, having a diversified portfolio is still important, even for long-term investments, to hedge the portfolio against external risks.
Long-term investments give good returns, provided you have the resources to invest for a longer duration. The key to long-term investments is not to get affected by frequent market movements. During the tenure, there may be times when markets go down, and the price of the equity also follows. The profits during this downtrend could be less than expected, which may make the investor tempted to book profits and exit the market before it moves to a loss position. Such market conditions usually end up derailing the investor.
For example, during the lockdown announced because of the covid-19 pandemic, many long-term investors sold their shares in a panic. Had they remained invested in their equities, today, they would be making far more profits.
Sensex was trading at 41,000 points and gradually fell to 25,000 points when the lockdown was announced. However, in 2 years, it is now trading at 58,000 points at the time of writing this article.
Here are a few essential points to remember to make the most of long-term investment opportunities.
1. Know the tenure of your investment
To get good returns without worrying about the fluctuations in the market, it is recommended to remain invested for a period of 7 to 15 years. For example, Eicher Motor in 2012 was available for Rs. 205, and in 2022, it is trading at around Rs. 3026 at the time of writing this article. Investors must be prepared to keep their capital blocked for a long duration to make the most of long-term returns.
2. Diversify your portfolio and rebalance when you get the opportunity
A combination of equity and debt funds could help in reducing the risk of the overall portfolio. Diversifying investments in different sectors also helps reduce exposure to a single industry. Though rebalancing regularly would defeat the purpose of a long-term investment, a structural shift in trends could open up opportunities to make wise investments in the long run. To protect the capital from depleting during inflation or recession, a temporary rebalancing could also help investors.
3. Strategise the investments
Plan an investment strategy according to your risk appetite. If an investor panics when markets go down, they may end up making the wrong decision. When the markets finally stabilise and recover, they may find it difficult to reenter the market. Therefore it is important to assess the markets regularly but stay focussed on the strategy adopted. Investing in good quality stocks with strong fundamentals could be adopted as one of the long-term strategies.
There are many ways of capturing the benefits of long-term investments. Depending on the market conditions, investors can enter different forms of long-term investments.
1. Direct equity
They are considered the best form of investment for the long term. Investing in direct equity could give high returns even though the risk involved is considerably high.
During a recession or in a bear market, these stocks tend to fall. It would be a great time for investors to enter the direct equity market just when the market is about to make a recovery. This way, they can take advantage of the reduced prices and enjoy the profit during market stabilisation as well.
- Dividend stocks
Investing in stocks that consistently distribute a good dividend could help long-term investors earn passive income from their equity investments as well. Typically, good-quality stocks come with great offers on their products and annual dividends. For example, companies like GAIL and ITC have been regularly giving dividends every year.
- Value stocks
These are stocks that are available at a cheap price compared to the valuation of the company. There is a good scope to get high returns in such companies because such stocks may rise fast. A good amount of market research and technical analysis can help investors identify such value stocks.
2. Mutual funds
This is a good form of investment for those who want to invest in stocks but do not have time to research and analyse the markets. Here one can diversify their investments by choosing safe and reliable companies to manage these funds. The funds are less volatile, and the returns are stable because the results are an average of all the stocks included in the funds.
Bonds are a part of the debt market and are categorised depending on tenure, the issuer (government, corporate or municipal) and other factors. The bonds purchased fetch an annual fixed interest. Investing in a bond fund is a safe option as a fund may own many types of bonds from different issuers. This helps in diversifying the holdings. The ideal time to invest in bonds is when equity markets are on a downtrend and showing no signs of recovery.
Other long-term investment plans that investors can opt for include:
National Pension Scheme: Under this scheme, the investor can invest in equity, other alternate investment options and government bonds as a preference. This is one of the safest options to accumulate money for retirement and carries tax benefits.
ULIP: Unit Linked Insurance Plan is an investment for those who want to invest in markets along with securing insurance. It helps capital multiply while giving the investors tax benefits every year and a hedge against unforeseen circumstances.
Real Estate: Property investment is considered a passive investment, but the returns can be huge. Proper planning should be done while investing in property so that it gives good returns. The returns from real estate largely depend on the location of a property. Property that has been rented out can generate monthly income while securing capital appreciation. Investing in real estate could prove to be a stable investment during inflation.
Making wise investments for the long-term could help secure the future of the investors. Remember to do your market research and plan your long-term investments wisely. While frequent changes should not affect long-term investments, investors should always keep a watch on impactful and permanent changes in the market.
By, Manish Jeloka, Co-head of Products & Solutions, Sanctum Wealth