Updated: May 13, 2022, 7:55pm
The investment game is akin to test cricket. You need patience, discipline, perseverance, planning, and a solid determination to win. Like a test match where victory depends on how many sessions a team wins, investment calls for winning the little battles in the journey to accomplish success in the end.
Long-term investment warrants inculcating these attributes. Irrespective of whether you want to build a sizable retirement corpus, accumulate funds for your child’s higher education or want to beat inflation, long-term investing is the way out. How to do so? Let us find out.
Before getting into long-term investing, have a holistic view of your financial goals. The ultimate objective of any investment is to achieve a goal. Hence, unless you have a clear understanding and vision of your goals, it is unlikely for you to ace the rigours required for long-term investing.
Divide your goals into three broad buckets – short, medium, and long. While short-term goals have a time horizon of six months to a year, medium-term goals generally require three to five years for accomplishment. On the other hand, long-term goals have a time horizon of above ten years or more.
Once you know the goals, you can estimate the money required to accomplish them. It will help you sort your finances and, more importantly, keep you motivated to save and invest for them. So, get back to the drawing board, chalk out your life goals, take stock of the finances, and get going.
As long-term investing requires discipline and patience, it is vital to start early. An early start imbibes financial discipline and brings compounding into play. Compounding has a multiplier effect on wealth creation. It also helps you accumulate a larger corpus.
For instance, if you are 25 and wish to retire by 60, a systematic investment plan (SIP) of INR 5,000 in an equity mutual fund offering annualized returns of 10% will help you garner a corpus of INR 1.9 crore. If you delay the investment by five years, the corpus will be INR 1.13 crore.
Therefore, being an early bird has its perks. It gives your money more time to grow and allows you to counter inflation.
Another way to remain invested for long is to invest in instruments with a long lock-in period. The lock-in serves twin purposes. It does not allow premature withdrawals and allows compounding to take its effect. Certain instruments like the public provident fund (PPF) and National Pension System (NPS) have long lock-ins.
15 years is the lock-in of PPF, while the NPS locks in funds until you turn 60. The former, though, allows premature withdrawals subject to certain conditions. However, it is in your interest not to withdraw unless absolutely necessary.
In the NPS, you can withdraw 60% of the corpus as a lump sum when you turn 60 and use the remaining 40% to buy an annuity plan that will give you a pension. Another financial product you can contemplate investing in is a unit-linked insurance plan (ULIP). ULIPs provide the dual benefit of insurance and investment in a single product and have a lock-in of five years.
However, to maximise gains from ULIPs, you need to remain invested for a long time, beyond five years.
Equities are volatile, especially in the short term. However, they can be equally rewarding and have the potential to deliver inflation-beating returns in the long run. Panicking and exiting following short-term market fluctuations can convert notional losses into actual ones.
The lure of earning inflation-indexed returns from equities prompts many investors to remain committed to their investments for extended periods. And they get rewarded for this too. For example, when markets nosedived in March 2020 after Covid-19 was declared a pandemic by the World Health Organisation (WHO), many investors remained committed despite seeing their returns in the red category.
Their perseverance eventually paid off, with markets recovering astoundingly well. Returns soared, and soon investors were sitting on meaty gains. Equity investment also builds patience to stay committed for long periods.
Markets are full of opinions and views that appear to fly thick and fast, especially when things go a little wayward. Suddenly, you will find everyone becoming an expert and sharing opinions. For long-term investing, you must ignore noises as they end up as distractions that can impinge on your goals.
Consult your financial advisor, who understands your financial plan, positioning, and goals if the situation demands so. More often than not, market noises force investors to act under impulse, resulting in flawed investment decisions. Therefore, look at the big picture and remain committed to your goals.
While individual brilliance can help you win a game or two, it takes a collective effort to win. It is the same for long-term investing. You cannot or rather should not depend on one financial instrument.
Diversify your holdings across different asset classes – equities, bonds, gold, among others – and also within an asset class. For example, within equities, spread your investments across large-cap, mid-cap, and small-cap funds. Diversification will provide stability to your portfolio and balance risk and reward.
Optimal diversification is an effective risk hedging strategy. A fundamental investment principle, optimum diversification also augments returns as market events affect each asset class differently.
Long-term investing requires periodical review. This is because situations change with time. The review will help you weed out laggards and tailor your investments based on your goals. Long-term investing has multiple benefits. Doing the right way can help you stay on a solid financial footing and be on your path to financial freedom.
Rahul Jain is the head of Edelweiss Personal Wealth. Prior to working for Edelweiss, he spearheaded the retail broking division of ABN AMRO India, and ICICI Bank. Rahul is a post graduate in business administration from IMT Ghaziabad.
Aashika is the India Editor for Forbes Advisor. Her 15-year business and finance journalism stint has led her to report, write, edit and lead teams covering public investing, private investing and personal investing both in India and overseas. She has previously worked at CNBC-TV18, Thomson Reuters, The Economic Times and Entrepreneur.
Updated: May 13, 2022, 7:55pm