Long-term investing means keeping money in various assets for more than a year. Depending on one’s goals, it can be up to three, five, ten years, or even longer. These assets include mutual funds, shares, and debt securities like commercial papers, debentures, etc. Commonly long-term mutual funds investment is recommended because it allows investments to grow in value over time.
Mutual funds investment can be a great option for investors, especially those looking to build wealth over time. A big advantage of investing in mutual funds is compound growth. Compound interest is interest earned on the principal amount plus past interest. When you make long-term investments, your mutual funds are compounded more frequently. Also, mutual funds are a financial product that likely includes every other broad category of product – debt, equities, and even REITS.
Benefits of Long-term Mutual Fund Investment
1. Reach Higher Financial Objectives Easily
Long-term investing horizons give investors many possibilities to achieve their objectives quickly. If investors have enough time, they will be able to plan their mutual fund investments better and identify income streams.
Instead of making a single, lump-sum investment, investors can divide assets into smaller SIPs that can be distributed across various funds over a longer term.
Additionally, long-term investments relieve investors from the ongoing need to monitor even the smallest changes in the market.
2. The Power of Compounding
Long-term mutual funds investment benefits from the power of compounding. However, to take advantage of compounding, you should start investing early. This way, you would be able to invest for a longer period. If possible, you should start investing as soon as you start earning. Let us understand how compounding works for early investors with the help of an example.
A (age 25 years), B (35 years), and C (45 years) start investing ₹10,000 a month (₹1,20,000 annually) for their retirement. They are investing in an equity mutual fund and expecting a return of 12% CAGR. They plan to invest till the retirement age of 60 years. Let’s see how much they will accumulate by retirement (age 60).
|Investor||Annual Investment||Time||Expected Rate of Return||Total Amount|
|A||₹1,20,000||35 years||12% CAGR||₹5,80,15,573|
|B||₹1,20,000||25 years||12% CAGR||₹1,79,20,072|
|C||₹1,20,000||15 years||12% CAGR||₹50,10,393|
As A starts early at 25, he will accumulate ₹5.8 crores. A’s retirement corpus is almost 12 times higher than C’s retirement corpus of ₹50 lakhs. C started investing at the age of 45 years, which is 20 years later than A. Hence, if you want to create wealth for yourself, you should start early.
3. Less Volatile
Volatility refers to market swings that could eventually affect the value of any investment. The sort of investment will determine how volatile it is.
Investors should never forget that swings are not losses and are only hypothetical in nature. However, investors with a longer investment horizon benefit from long-term positive returns.
4. Beats Inflation
Inflation is a long-term investor’s worst enemy. Whether you are investing to build equity or for retirement, sudden inflation increases can swiftly erode the value of your assets and reduce your returns.
Therefore, mutual funds investments are safe because of how inflation affects investments. Only mutual funds offer returns that outpace inflation. If you start early, your assets will grow significantly faster.
Naturally, investing requires a lot of time. You won’t feel very confident about investing in your first year. Also, you will probably make a number of changes to your mutual funds investment strategy during your first few years. Therefore, the sooner you start, the sooner you will be able to handle any setbacks.
Additionally, a long-term investment horizon allows your money to adapt to changing short-term market corrections and gain from compounding over time.
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