Why long-term investment in equity mutual fund?
Long-term investments aim to finance your future goals, like higher education, home, retirement, etc. Long-term goals generally have a horizon beyond ten years. Equity-oriented schemes are considered one of the best long-term investment options. Equities have a higher potential for growth, even though they are more volatile in the short term than hybrid and debt funds. A well-diversified equity fund is more likely to offer stable growth over a long period. Hence, choose a fund that suits your wealth creation strategy.
What is a long-term investment?
Long-term investment means holding different assets like mutual funds, securities, shares and stocks for more than a year. It is a good timeframe in terms of taxation. However, a year is not the ideal investment horizon to reap good returns when it comes to investing.
Long-term investments are mostly investments that go far in time- say, 3, 5, or 10 years. You will be surprised how your money worked for you and made your present requirements look like a piece of cake.
Benefits of Long-term Investments
There are various benefits of long-term investments. Your short-term investment goals might be solid, but your chances of success are slightly less. Long-term investments not only help you reap compounding benefits but also gives you time to correct any investment mistakes. It may happen if you are a beginner or someone who might have misinterpreted some facts.
The following benefits will help you understand the importance of long-term investments-
Power of compounding
Let’s understand this with an example. Let’s say you invest Rs 10,000 per month from the age of 25 until you retire at 55 years. With mutual funds (reinvest option) & expected rate of return at 12%, your principal investment portfolio would read Rs 36 lakh at maturity.
By investing Rs 1,20,000 in the first year, your principal would be enhanced to touch Rs 1,28,093 in the second year and so on. Hence, your investment corpus would touch Rs 3.5 crore at the time of redemption (maturity) i.e. after 30 years.
Year Invested Amount Expected rate of return (12%) Total value 1 1,20,000 8,093 1,28,093 5 6,00,000 2,24,864 8,24,864 10 12,00,000 11,23,391 23,23,391 20 24,00,000 75,91,479 99,91,479 30 36,00,000 3,16,99,138 3,52,99,138
You have the potential to earn such returns with the power of compounding. This power can be harnessed when the investments are planned for a long-term horizon.
Diversifying your investment portfolio is the key to reaping maximum gains and minimising risk. It is one of the best ways to balance risk. Mutual Funds usually invest in a basket of securities. Selecting a fund that invests across different sectors can help in diversification. Ultimately, it will help you minimise & balance risk.
Rectifying investment mistakes
Long-term investments allow you to monitor and check out alternative options to maximise your returns. Sometimes, as a beginner, learning a few technicalities takes time. You may have to take critical investment decisions that will help you minimise any losses and help generate returns.
Investments require a plan, strategy, discipline, consistency and patience. Additionally, it requires regular monitoring of the portfolio. For most investors, retirement is the primary goal. But so are other life goals like buying a car, owning a house, or even going on a vacation. It is always advised to start investing early, so the investors can take risks in their early years of investing and earn more through compounding. The longer the period of investing, the higher the chance of gaining returns. When the time horizon is in decades, market downturns and other risks seem minor, and return potential will be higher.
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