Equity-based investments mainly refer to direct investment in shares of companies and mutual fund investment. Historical data shows that equity-based investments outperform other asset classes and hence it’s potential to create wealth in the long term is proven. Considering today’s inflation rate, we need to include equity investments in our portfolio to grow our money.
Ask any financial expert about equity market investments, the first thing they would advise is to go for LONG-TERM investment. Why do they underline the long-term strategy? There are several reasons.
Riding out volatility
Everyone knows that stock markets grow through ups and downs, and in some cases, it takes years for the market to recover from a fall. Moreover, the risk factor is high compared to other investment assets and an investor need not necessarily get profit soon after investment. Long term investments help to smoothen out the ups and downs of the market. When you invest for the long term, you can ride out short-term market downturns without having to sell your investments at a loss. This means that you are less likely to panic and make rash decisions when the market is volatile.
While investing in the stock market, always do your research and select fundamentally strong stocks. You can also check Geojit’s research recommendations before investing.
Experts say, investors should consider a minimum investment period of five years or more for investing in the equity market. And we should be mentally prepared to remain calm while the market goes through a downturn. As mentioned above, in some cases, it can take three to five years or more for the stock market to recover from a fall. Therefore, the money kept aside for your immediate requirements should not be invested in long-term investments. If you do so, you may have to withdraw it at a loss in the event of a market fall.
Turn every dip into buying opportunity
Market crashes are good buying opportunity. Investors can make good use of crashes by buying good quality stocks at lower prices and book profits when markets climb. But since the market fluctuations are unpredictable, it can be difficult for a common man to know when it is the right time to invest. Systematic Investment Plan (SIP) in mutual funds is the apt solution. In SIP, one need not look at the ups and downs of the market as the investment date is fixed in advance. Besides, the investor gets the benefit of accumulating more NAV when the market slips, thereby making a gain out of volatility.
What attracts investors to mutual funds is high returns delivered in the past. While bank deposits fetch 6-8% return, mutual funds give 12-15% return, but remember mutual funds do not offer assured returns. Here, it is important to note that 15% growth in a fund does not mean that the investment has given such an impressive growth every year. If this growth rate is for the last three years, on some occasions, for example, this investment may have underperformed in the first two years. The favorable factors received in the third year would have led to 15 percent growth. Those who sold in the first two years of investment may have made a loss if they had redeemed their investment.
The Magic of Power of Compounding in SIPs
Another important reason for recommending long-term investing through SIPs is to take the advantage of compounding. In simplest terms, compounding interest means interest on interest. Each time you earn interest on your principal amount, it is added to the original amount, which then becomes the principal for the next cycle. This allows exponential growth for your interest.
Savings for Retirement
Additionally, long-term investments can be a good way to save for your retirement. Because you have a longer time horizon to invest, you can take risk and invest in higher-growth assets that can help you to build a larger retirement corpus.
Overall, long-term investing is advisable because it can help you to earn a higher return on your investment, smooth out market volatility, and save for your long-term financial goals.
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