Investing is now easy with a digital investment management platform, but it shouldn’t be done on a whim. Long-term mutual funds are suitable for investors who wish to invest for a longer investment horizon of beyond 5 years and undertake certain risks. Your long-term investment goal must be satisfied by the type of equity mutual fund for a successful investment.
If you do decide to enter the world of investing, you should consider how long you actually want to invest and whether you are willing to invest long-term. In fact, there are many benefits to holding an investment for years. Here are five benefits of long-term investing.
Power of Compounding in long-term
As Albert Einstein quoted, Compounding is the 8th wonder of the world, whoever understands it makes a profit and those who don’t, don’t!
The power of compounding comes into reality during long-term investments when your investments produce gains through stock returns, dividends, etc, they get reinvested in the stock and can earn even more. The longer you invest in the market, the more room there is for the power of compounding to grow. Your investment can grow significantly over time.
For example, let’s take two investors, Anoop and Arun, who have the same starting balance say Rs 1 lakh each. Both decide to buy the same investment on the same day and receive the same 10% interest rate. The investment will be maintained for 30 years. Anoop redeemed interest at the end of each year, while Arun reinvested the interest amount back into the investment amount.
After 30 years, Anoop who withdrew the interest will earn Rs 10,000 per year i.e.Rs 3,00,000 over 30 years. But Arun who decided to reinvest the amount will get Rs 16,44,940 over and above his initial principal balance which is more than 5x of Anoop.
This example explains the power of compounding. Long-term investment takes advantage of the power of compounding and returns are maximized.
Less time required
Long-term investments don’t take much of your time. Invest in the funds that you discussed with your mutual fund distributor who is a subject matter expert in the field and remains invested in a disciplined manner. All you have to do is regularly check that the fund is doing well. If you need more clarification, you can connect with your trusted mutual fund distributor. Short-term investments and trading require a full-time commitment.
Cost-effective
Most investors gave huge fees, various taxes, and brokerage fees by trading stocks continuously. The more you trade, the more charges you will have to pay. Long-term investors can save on all these costs by investing in mutual funds. Each rupee saved can be added more to their investment capital, making their long-term investment very powerful.
Timing the market is not required
It is very complex for most of us to predict the market for when to enter and exit consistently and accurately over various market and business cycles. 95% of Traders who try to time the market tend to underperform and barely earn gains in comparison to those who stayed in the market for a longer term. Short-term investments and trading require a full-time commitment.
Highly effective for long term
Long-term investing plays because they allow you to focus on what really matters. Long-term investors will look at the core fundamentals of the entity such as performance, growth prospects, and management capabilities, then at the day-to-day volatility of a NAV price.
Over the long term, daily fluctuating movements tend to normalize an upward trend depending on the performance of the business. Historically, these factors are very effective to predict returns in the future.
Achieving long-term financial goals:
Are you saving up for your retirement, buying a home, or starting a business? A long-term investment is the best way to go! To prepare for a high-cost future, you should cut down your current costs and invest the same money for a longer period of time. The earlier you begin, the more the compounding effect gets wider and better.
