A comprehensive guide: Long-term strategies to build wealth

All of us have financial aspirations and we strive to achieve them through wealth creation. But to create wealth, one must generate income, save diligently, and invest wisely. While many individuals excel at earning and saving money, they often lack the necessary guidance to make sound investments that can lead to long-term wealth accumulation. Thus, if you are seeking effective strategies for long-term investments aimed at building wealth, here’s some important insights to explore.

• Table of contents

1. What is a long-term investment?
2. What are some popular long-term investment options?
3. Tips for optimising returns and mitigating risks
4. What are the pros and cons of long-term investing?

What is a long-term investment?

A long-term investment plan refers to the process of acquiring an asset and holding it for a significant period, typically more than a year (often five or more years) with the primary objective of wealth creation. Many investors opt for long-term investment strategies in the stock market, where they purchase stocks with the intention of holding them for an extended duration.

Apart from stocks, there are various other assets in which one can make long-term investments, including real estate, gold, bonds, and more. The idea behind long-term investment plan is to benefit from potential growth and appreciation of these assets over an extended period. A longer horizon allows investors to capitalise on market trends, get compounding returns, and let the power of time generate substantial wealth.

What are some popular long-term investment options?

Here are some of the popular long-term investment plans in India:

Equity Mutual Funds

Equity mutual funds have the potential to generate relatively better returns by investing in the market and have historically outperformed inflation.

Equity mutual funds are a type of investment that pools money from multiple investors and invests it in a variety of stocks. Equity mutual funds offer several advantages over other types of investments, such as:

• Diversification:By investing in a mutual fund, you can diversify your portfolio, which can help to reduce your risk.
• Professional management:Mutual funds are managed by professional fund managers who have the expertise and experience to choose the stocks for your portfolio to generate long term growth.
• Liquidity: Mutual funds offer high liquidity, which means that you can easily sell your scheme units if you need to.

In addition, there are different types of equity mutual funds to suit various investor needs and risk appetites. Some popular equity mutual fund schemes include:

• Large-cap funds: Large-cap funds invest in the stocks of large companies. Here, minimum investment in equity and equity-related instruments of large cap companies is 80% of total assets. Large companies are typically well-established and have a long track record of profitability. The universe of “Large Cap” consists of 1st to 100th company in terms of full market capitalization.
• Mid-cap funds: Mid-cap funds invest in the stocks of mid-sized companies. Here, the minimum investment in equity and equity-related instruments of mid cap companies is 65% of total assets. Mid-sized companies are typically growing faster than large companies, but they also carry more risk. The universe of “Mid Cap” consists of 101st to 250th company in terms of full market capitalization.
• Small-cap funds: Small-cap funds invest in the stocks of small companies. Just like mid-cap funds, the minimum investment in equity and equity-related instruments of small cap companies is 65% of total assets. Small companies are typically the riskiest type of investment, but they also have the potential for the better returns when compared with large and mid-cap funds. The universe of “Small Cap” consists of 250th company onwards in terms of full market capitalisation.
• Value funds: Value funds invest in stocks that are trading below their intrinsic value. Intrinsic value is the value of a stock based on its underlying assets and earnings potential. The minimum investment in equity and equity-related instruments is 65% of total assets.
• Dividend yield funds: Dividend yield funds invest in stocks that pay high dividends. Dividends are a portion of a company's profits that are paid to shareholders. Dividend funds are considered to be relatively low-risk investments. Minimum investment in equity-65% of total assets.

Choosing a suitable equity mutual fund depends on your individual circumstances and goals. It is important to consider your risk tolerance, investment horizon, and financial objectives when choosing an equity mutual fund. Moreover, if you are new to investing, it is a good idea to consult with a financial advisor to help you choose the appropriate equity mutual fund for your needs.

Let’s have a quick look some other long duration investment plans in India:

Public Provident Fund (PPF): PPF is a safe long-term investment option with relatively lower returns. The returns are tax-free and based on the prevailing interest rate.

Real estate investments: Real estate is a tangible asset that provides long-term value. While it requires a substantial initial investment, it offers potential returns. However, property prices can be unpredictable, and are influenced by various factors. Moreover, real estate investments are not very liquid.

National Pension Scheme (NPS): NPS is a government-backed retirement scheme that requires regular long-term investments. The returns are tax-exempt under Section 80C of the Income Tax Act.

Post Office Savings Scheme: The post office savings schemes offer safe investments with stable returns. They are government-backed and have various duration options.

Gold investments: Gold, a popular investment option in India, provides slow but steady growth. Gold coins, bars, and jewellery are traditional forms, while Gold ETFs and Digital Gold are gaining popularity due to ease of storage and safety.

Tips for optimising returns and mitigating risks

Assess your risk tolerance: Risk tolerance refers to an investor's willingness and ability to bear the potential loss of their invested capital. It is influenced by factors such as age and current financial obligations. For instance, younger investors who are unmarried and have fewer financial responsibilities often exhibit higher risk tolerance compared to older investors in their late 50s who may have dependents and greater financial commitments.

Maintain adequate portfolio liquidity: To mitigate the risk of being forced to sell investments during a market downturn, it is crucial to ensure sufficient liquidity in your portfolio. Liquidity refers to the availability of cash or easily convertible assets that can be accessed quickly without significant loss of value.

What are the pros and cons of long-term investing?

Pros of Long-Term Investing

• Economic growth and sector opportunities: Economic growth in India presents substantial opportunities for long-term investors. The transition from traditional sectors to technology, pharmaceuticals, and consumer goods provides a chance to capitalize on increasing demand and global market integration. Investing in these areas aligns with India’s economic growth and growing consumer spending.
• Compounding returns: Compounding returns play a significant role in long-term investing. Reinvesting earnings allows investors to grow their investments exponentially over time. In a growing economy like India’s, the compounding effect on investments such as equities and mutual funds can be substantial.
• Strategic portfolio diversification: Strategic portfolio diversification is crucial. Spreading investment across various sectors and asset classes helps mitigate risk and enhance returns. Investing in different areas like technology, healthcare, and infrastructure can balance their portfolios and minimize the impact of downturns in any one sector.

Cons of Long-Term Investing

• Capital lock-in: When you invest for the long term, your money is tied up for extended periods. This can pose a problem if you need emergency funds or other opportunities. Accessing the money may require selling investments, which could result in potential losses.
• Market volatility and economic cycles: Market volatility and economic changes impact long-term investments. Market fluctuations, economic downturns, inflation, and policy changes can influence the value of investments. The inability to adjust quickly to these changes can lead to potential losses.

FAQs:

Is it good to invest for long term?

Yes, investment plan for long duration is usually considered beneficial. Long duration investment plan allows for the potential to ride market fluctuations, reap the benefits of power of compounding and build wealth in the long run.

Why is it important to research the market before making mutual fund investments?

Engaging in market research is a critical step when contemplating an investment. This decision holds the potential to have a substantial impact on your future, making it prudent to dedicate time to thoroughly researching the market. Conducting comprehensive market research enables you to gain insights into the current market conditions and aids in identifying investment opportunities within specific companies or sectors.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.