How are long-term investments beneficial?

Now that we know what qualifies as a long-term investment, we can move on to the question of the hour – what are the benefits of having a long-term investment plan?

Let’s see what we’ve got –

Potentially Higher Returns – Long-term investments are a good way to earn high returns due to the miracle of compounding. Over an extended period of time, compound interest starts to add up – and since it basically means you are earning interest on your interest – it is a good way to get the maximum benefits of the interest, of compounding, and of long-term investment plans as well. (We’re addressing compounding in a bit more detail as you read on!)

Wealth Creation – Opting for a long-term investment plan allows investors to not only accumulate wealth but allows them to earn returns on this wealth. When you add the principal amounts of long-term investments and couple it up with the compounding returns, what you ultimately get is your money making you more money, a.k.a, wealth creation.

Diversification – There are a number of options for long-term investment plans with high returns. You can invest across asset classes ranging from mutual funds to stocks, bonds, real estate, and commodities (read: gold). And since diversifying your investment portfolio can help mitigate the risk associated with investing, it allows investors to gain relatively stable returns over a period of time.

Tax Benefits – Yes! A number of long-term investment plans (of over one year) offer investors a tax benefit. These can be in the form of mutual fund investments, infrastructure bonds, and even long-term secured bonds. Under Section 80C of the Income Tax Act, investments in such assets can reduce your taxable income up to ₹1.5 lakhs! (We can feel we’re getting you hooked now!)

Protection from Inflation – What does inflation do to your money? It reduces its purchasing power. However, if you are investing in long-term plans, then your returns start to add up, offering you a bit of a cushion for when inflation occurs. While saving money is important, when inflation hits, investing for a longer period of time beforehand is like a preventive measure to help you sail through when the times get tough.

This covers the why of long-term investments. Which means we’re now set to discuss the how –

Long-Term Investments’ Two Little Helpers

Here is a user story to offer you some context for the merit of long-term investing.

“I am a Deciml user who is committed to being a long-term investor. My round-up limit has been set to ₹10, and my Daily Deposit limit is set to ₹100. In the last 8 months, I have invested ₹21,960 through Daily Deposits, ₹3,009 from Round-Up deposits, and ₹6,590 through Lump Sum investing using the Deciml App.

So, my current investments stand at ₹31,560, whereas my earnings are ₹1,369.24. I am earning ₹8.65 interest daily! Since I was excited to know how my money is going to grow, I checked in with Sprint (the Deciml investment trajectory dial on my home screen) and it says –

If I continue investing how I am today (even though I plan on increasing my investments soon!), I am looking at having a total of ₹88,400 a year from now, and ₹8,00,000+ 10 years from now. All this, just from practicing disciplined investing daily. How cool is that?”

While this user’s story is super cool – it is also math. 🙂

But we’re going to break it down for you –

The First Helper – Rupee Cost Averaging

Instead of investing large sums of money in one go, it might be more efficient to instead invest small amounts for longer periods of time. This is due to rupee cost averaging. Let’s look at an example to understand this –

Scenario 1 – You want to invest ₹12,000 for the year. You have the option to invest it all at one go, so you get to buy a total of 240 units, at ₹50 each.

Scenario 2 – You want to invest ₹12,000 for the year. You decide to split this into two installments of ₹6,000 each. Today, for ₹6,000 at a NAV of ₹50, you can buy 120 units of a selected mutual fund. You decide to invest the remaining ₹6,000 six months later – when the NAV is ₹30. So at that time, you can buy 200 units of the same mutual fund.

This means that with the same ₹12,000 investment in a year, you can either get 240 units of a mutual fund or 320 units of it.

Rupee cost averaging is a great tool to maximize the earnings potential of any investment, and one might attribute the success of Systematic Investment Plans (SIPs) to this. 

The Second Helper – Compounding Interest

Compounding interest is the second reason why our Deciml user has such a promising trajectory! Simply put – compounding interest is the interest you earn on your interest. Let’s see an example to help illustrate this –

Assume that you are investing ₹100 at 10% interest per year. So your ROI for the first year is ₹10, i.e., 10% of ₹100. Here ₹100 is your principal amount, and at the end of one year, you’ve got yourself ₹110. Through compounding interests, the second year’s principal amount becomes ₹110. You will now make a 10% interest on this investment amount (i.e., ₹10), making your total amount at the end of the second year ₹121. And the pattern continues for the whole tenure of your investment.

Here is a look at how 10% compounding interest would work over five years of investments. Keep in mind that while higher amounts of investment will obviously gain better returns with a 10% interest rate, compounding becomes a true ally the longer that you stay invested!

Long-Term Investment Options

So, we’ve covered the benefits of long-term investments, and have touched upon how these benefits come to be, we can now share some long-term investment options with you –

Equity Mutual Funds – Known to deliver higher returns over a long period of time, equity mutual funds are assets belonging to companies that are listed on the stock market. These are helpful for building wealth, especially through a SIP structure.

Public Provident Fund (PPF) – This is a super-long investment. It is like a Provident Fund, except the government is matching your investments here. The PPF funds are untouchable for at least 5 years (after which you can withdraw partial amounts), and are otherwise redeemable after a 15 year period.

National Pension Scheme (NPS) – The ideal retirement fund provided by the Government of India. You have to remain invested in this fund for at least 3 years.

Real Estate – We can feel the millennials grimacing at this one! But, real estate continues to be a sound investment (if you can afford it!). Staying invested in real estate can offer a fairly appreciated resale value after a few years of market fluctuations. It is also one of the few investments that can be liquidated relatively quickly, to redirect your capital toward other, bigger real estate investments.

Gold – Old is gold. And old gold is still valuable! The value of gold remains relatively stable over a period of time, and it can easily be liquidated. However, the longer you hold onto your gold, the more likely you are to be able to liquidate it at a profit (subject to market conditions, obviously!)

Phew! That was a long read – but it seems to fit the theme, no?

Long-term investments are a good way to practice regularity and see your investments grow. Remember that investments with longer maturity periods are an efficient way to not only accumulate and preserve capital but are also a great way to augment your wealth to meet your long-term life goals.

FAQs

What are long-term investments?

Long-term investments are typically described as those investments that have a maturity period of over 3 years and are not particularly easy to liquidate.

What are some of the benefits of investing for longer periods of time?

Long-term investments can bring in potentially higher returns, owing to the compounding interest which accumulates over time. It is beneficial to stay invested for longer periods of time and offers investors the chance to diversify across asset classes. These also offer some tax-saving advantages and can offer some security in times of inflation.

What are some popular long-term investment options?

Long-term investment options include equity mutual funds, real estate, gold, Public Provident Fund (PPF), National Pension Scheme (NPS), etc.

Are long-term investments risk-free?

No investment is completely risk-free. Long-term investments can help mitigate risk through diversification, and rupee cost averaging, but it is never free of risk entirely.

Are long-term investments a good option?

Yes. Long-term investments are a great option to multiply your wealth. When practiced regularly, the benefits of compounding can be helpful for gaining big returns from long-term investments.