Invest for long or get rich quickly, generally, these two strategies spark a lot of debate. Investment has always been a wealth creation tool but does it take too long to build wealth. It depends on the kind of investor you are. While a value investor would argue that long-term investment is the key, an intraday trader's opinion may differ. He/she believes that taking advantage of day-to-day market volatility will also lead to wealth creation.
It is no secret that investment is risky, but building wealth depends on your goals. Short-term investments are riskier since you do not have time to recover in case of a loss. Hence, a lot of investors prefer the long-term investment way. It slowly builds your wealth using the power of compounding and has less risk.
Also, if you invest in a firm with good growth potential, it does not make sense to sell in the short term. Most investments from stocks to bonds to MFs take time to generate massive returns. Even though people expect to make money quickly, it takes an investor years to learn how to choose the right portfolio.
So it is up to the investor to decide which goal suits him/her the best. If an investor is happy with investing ₹100 and making ₹200, you can choose short-term investment but if you want to invest ₹5,000 and make ₹50,000, long-term investment is the way to go.
The power of compounding helps long-term investors accumulate wealth in the long term. Compounded interest means the interest on interest. Every time you earn interest on your principal, it gets added to your original principal amount. So the next time you earn the interest on the increased principal amount. Over time, this allows your interest to grow dramatically.
For example, suppose you invest ₹5,000 in a mutual fund. This amount earns you a return of ₹500. Then this return is added to the original investment amount, making the principal ₹5500. Now, you will earn interest on ₹5500 and not ₹5000 which will keep on increasing till you redeem your investment.
The longer you invest, the more wealth you accumulate through this method.
Let's take an example.
Let's say there are 2 investors, A and B. They both start earning when they are 25. Investor A starts investing ₹5000 per month from the age of 30 and continues till the age of 60, while investor B starts investing ₹10,000 per month at the age of 40 and continues till 60. Even though the amount of investment for B is more, the total time for the investment is less. Let's assume they both get a rate of interest of 12 percent per annum for this example.
So at the age of 60, Investor A will get ₹1.76 crore with an investment of ₹5000 per month for 30 years at 12 percent per annum.
While Investor B will get ₹99.9 lakh at the age of 60 for an investment of ₹10,000 per month for 20 years at the interest rate of 12 percent per annum.
The same is true for lumpsum investments as well. Suppose A invests ₹50,000 at 12 percent per annum for 30 years, he will get a total of ₹14.9 lakh.
Meanwhile, suppose investor B invests ₹1,00,000 for 20 years at 12 percent per annum. He will get a total amount of ₹9.64 lakh at the end.
So as we can see from the above examples, both in SIP mode as well as lump sum mode, even though investor B invests more money but for a shorter period, his total returns are less than that of investor A, who invests less money but for a longer period.
There have been a number of high-value stocks like HDFC, MRF, Wipro, where an investment of just ₹1,000 in 1990, will today have given you returns in crores in the present. Even though it seems difficult to hold a stock for that long and not book profit, one must note that the investment made was just ₹1,000 to garner crores in return. Also, as time passes, an investor can increase his/her investment amount which can lead to generating more returns in a comparatively shorter amount of time, say 15 years instead of 20. Hence, wealth can be created sooner, as long as the investment amount is also continuously risen over the years.
Patience is very important for creating wealth through investment. Even though it is not quick money like in short term investing, the wealth generated after a long term will be more.