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Long-term investment, Its Importance for You

Long-term investment, Making money is one thing. Using your money to make more money over time through smart investments, however, is something that will take a little more planning–and, of course, lots of time. Accumulating wealth for financial goals such as funding your retirement or your children’s college education is a long-term proposition that requires a commitment to saving and investing over time.

Many financial experts suggest that you need to build a sufficient emergency fund before you decide if to invest money long-term. After that, you can explore investing for long-term goals.

What are Long-Term Investments?

Long-term investment
Long-term investment

A long-term investment is generally defined as investments that can be withheld for more than 5 years. Instrument facilitating long-term investments include stocks, real estate, and cash.

A long-term investment is key to maximizing the growth potential of your savings, no matter how big or small your savings may be.

Benefit from investing over the long term?

benefits of Long-term investment
benefits of Long-term investment

Benefit of Compounding

One of the advantages associated with long-term investing is the potential for compounding. Here’s how it works: When your investments produce earnings, those earnings get reinvested and can earn even more. The more time your money stays invested, the greater the opportunity for compounding and growth. Keep in mind that while compounding, overall, can have a significant long-term impact, there may be periods when your money won’t grow. While there are no guarantees, the value of compounded investment earnings can turn out to be far greater over many years than your contributions alone.

Short-term volatility can be ignored.

Invest for the long term, and you can ignore the short-term volatility of the market. How? Because price movements become more predictable when held for the long term.

Less Tax

Taxes are less on long-term investment, so while investing, considering the tax liability that may be applicable on the gains is a good idea.

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Where to Invest for Long Term?

What should be the thought process while practicing long-term investment?

Which assets should you consider for long-term holding? Here is a list of 6 such assets:

  1. Stocks: Buying value stocks are best for long-term investing. If you are not so conversant with value investing, then focus on other stocks. Three types of stocks that you can consider for long-term holding are (a) dividend stocks, (b) blue-chip stocks, & (c) growth stocks.
  2. Equity Mutual Funds: If you are not comfortable investing in stocks directly, then a good alternative is mutual funds. Expert fund managers manage these funds.
  3. Exchange-Traded Funds: These are basically a hybrid product of stocks and mutual funds. If you want to benefit from both stocks and mutual funds, you should consider investing in ETFs.
  4. National Pension System: This is a product launched by the Government of India. People who are not already included in the government pension scheme or EPF scheme can plan their retirement using NPS. 
  5. Real Estate: To diversify beyond the ambit of equity, you can also consider real estate for long-term investment. If practiced properly, real estate investing can yield returns like equity. There are rules of real estate which is slightly different from equity, but it is worth trying.

When is the best time to begin a long-term investment program?

No one has figured out the best time to invest.

You may be one of them, lying in wait, ready to strike when the time is right to take the plunge into investing long-term finally. You’ve reviewed long-term investment strategies, read up on investment planning opportunities, listened to all the pundits,  and read the forecasts. You’ve done just about everything except actually investing.

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Let’s cut to the chase. The answer to when you should start investing long-term is exceedingly simple — as soon as reasonably possible, assuming:

  1. All of your high-interest debt has been paid off.
  2. You’ve built an emergency fund to provide a minimum of three months’ basic income should you lose your job.

If you pass those two tests, you should start investing long-term, whether 12, 32 or 60 years old. There’s almost no way your future self will regret making the decision.

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