Posted On Monday, Feb 13, 2017
When it comes to investing for your future, there are a lot of publicly traded stocks and investment vehicles to choose from. Although there is no specified formula or handbook that investors are expected to follow, there is one general rule: Invest for the long-term.
If you need funds for the short term, investing in stocks is not encouraged as the markets tend to be volatile and can swing in either direction based on a lot of factors. That is why, in India, gold and real estate are preferred investment options. However, if you're looking to harvest your returns 5 or more years into the future, an investment in equities or an equity fund (an equity fund is a mutual fund that invests principally in stocks) can be ideal.
Here are 3 reasons why long term planning is essential when investing in equities.
1. Harness the power of compounding
Your age and financial responsibility play an important part in your investment decisions. Since youngsters have fewer financial responsibilities such as retired parents, a spouse, children, or car or home loans to pay off, they are encouraged to start their investments early. A young individual also has a high risk-bearing capacity, being able to withstand the swings of the market. Moreover, buying stocks or investing in equity for the long term allows you to take advantage of compounding (i.e. the interest begins earning interest on itself!).
Compounding requires two factors for it to work: the reinvestment of earnings, and time. The more time you give your investments, the more you can accelerate the income potential of your original income.
For example, an investment of 10,000 at 10% will result in 11,000 in one year. If you decide to reinvest the gain of 1,000 and receive the same rate of return, your capital will grow to 12,100 by the end of the second year. By contrast, not reinvesting the gains would have resulted in capital of just 12,000. This difference seems small over short time periods, but if one were to sustain the same 10% annual rate of return over a decade, the difference would show 25,937 for the reinvested corpus, versus just 20,000 total for the portfolio with gains pulled out of the market.
|Year||Starting Value||Multiplier||Interest Earned||End Value|
The above table is for illustrative purposes only.
2. The data doesn't lie
Although there have been ups and down, history shows that if you align your portfolio for the long term, you're more likely to make money, especially if you focus on high-quality businesses.
After the 2008 crisis, many investors terminated their SIPs. This was a really bad choice because the whole point of an SIP is to keep investing, irrespective of market conditions. Investments made when the markets are down big tend to make the greatest profits - as Warren Buffett says, "Be greedy when others are fearful."
3. You can correct investment mistakes in the long term
Anyone can start a long-term investment; you don't have to be an investment guru to invest in well-run businesses for the long term. An important thing to remember is that you will make mistakes; even the best investors have been wrong. But a regular review of investments every six months can help to correct at least some of these mistakes. It is important to hold on to companies that have historically demonstrated strong growth and add to companies whose business models are still intact but have fallen on hard times.
Mutual fund investments are subject to market risks read all scheme related documents carefully.
Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.
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