Saturday, November 27
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How Investing in Equities and Equity Funds Pay Off in Long Term

Investing in equities is the process of buying shares in a company’s ownership and equity is the total amount of money that an investor receives when the company pays off all its debt and liquidates its assets. When you make an investment in a company’s equity, you become its partial owner.

The advantage of being an equity shareholder is you have the right to participate in the company’s profits. It is usually said that you should stay invested for a long time in the market to reap the benefits of your investment. Staying invested for a long period might sound like a hassle, but there are several benefits to it.

Long-Term Investments

Long-term investments are assets that an individual intends to own for a period of over three years. One can hold stocks, real estate, cash, etc., for the long term. Investors prefer long-term investments because they are likely to give higher returns. When we look at the data, we can see how investors have historically experienced a much higher rate of success over the longer term.

Why Choose The Long-Term Investment Horizon?

The stock market is unpredictable, and this may push people to become involved in short-term trading. Many would prefer taking the route of investing in several instruments for a short period and redeeming their money within a year or so. However, staying patient during unpredictable times come with their own set of advantages.

Higher Returns: When compared to short-term investments, if you stay invested for the long-term in either stocks or equity mutual funds, you may be able to beat inflation. Let’s say, an investor has invested in a bank deposit that gives them a return of 9.5% per annum, and if the inflation is at 7%, then the investor’s net saving is only at 2.5%. It might not look so problematic for the short term, but it has a big impact on long-term savings. Meanwhile, equity mutual funds have given an average return of 13%-15% in the last couple of years. So, the investor’s real rate of savings remains much higher than 1%-3% when they invest in equity mutual funds.

Less Tax: Since returns from equity funds are tax-free if held for over a year, it helps you earn higher average returns. The same goes when you do stock trading for the long-term. When stocks are held for the long term, one can take advantage of capital gains reductions. 

Compounding: Investing in equity funds for the long-term helps you benefit from the power of compounding. For example, if an investor invests ₹1 lakh every year from the age of 25 years until they retire at 58. Then, by the time they have retired, they would have invested ₹34 lakh. If they would have invested in mutual funds, which offered a compound interest of 10%, then their investment corpus would touch ₹2.7 crores at the time of redemption (maturity). 

If one starts an SIP (Systematic Investment Plan) in an equity fund and keeps a long-term investment horizon, they will also benefit from rupee cost averaging.

Cheaper: The longer an investor holds shares, the less they pay in trading costs because they are conducting lesser transactions. Even if they do buy stocks, those trading costs will generally be negated by the potential gains from holding the shares for that amount of time.

Ways to Invest in Equities

Stocks – One can start direct investment in their desired stocks by opening a trading account and a Demat account with any online or offline stockbroker. A Demat or dematerialized account holds your shares in an electronic format while the trading account is the account with which you can buy or sell orders with your stockbroker. Like all other investments, stock investment has its pros and cons.

Pros

  • High return
  • Choose from a vast range of stocks

Cons

  • High risk
  • Proper research needed

Mutual funds – A mutual fund is a type of investment in which money is pooled from many investors with the same financial objective and invested in securities like stocks, bonds, money market instruments, and other assets accordingly. In the past few years, mutual funds have become one of the most preferred investment methods to build a corpus for different financial objectives. One can start their mutual fund investment journey with renowned fund houses like SBI Bluechip Direct Plan-Growth, Axis bank long term equity fund growth, ICICI prudential mutual funds etc.

Pros

  • You get professional management; fund managers decide the investment strategy
  • Diversification

Cons

  • Exit load –  An exit load refers to the charge/fee that the Asset Management Companies (AMCs) charge investors at the time of exiting or redeeming their fund units.
  • Expense Ratio – Expense ratio is the amount fund houses charge to manage funds on the investors’ behalf. Direct plans have a low expense ratio compared to regular ones. The expense ratio is expressed in percentage.

Final Thoughts

As we have mentioned, there are several benefits to staying invested for a long period. When you choose to go long-term, it takes the worry off your mind as well, as you don’t need to time the market or worry about every high and low. When the value of your investments grows, the profits grow as well. If you want to take complete advantage of everything the stock market has to offer, then we would suggest you stay invested for a while. Because, the wait is worth it, and it does pay off in the end.

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