Keep A Longer Investment Horizon For MF Wealth Creation

A long-term investor has a chance to buy at healthier valuations and reap the rewards as it continues to grind higher over a period of time. The key to success is to have a plan and stick to it regardless of market levels.

The legendary investor Warren Buffett always stressed on the benefits of long-term investments. His famous quote “If you aren’t thinking about owning a stock for 10 years, don’t even think of owning it for 10 minutes” explains his investment philosophy.

Many cringes at the thought of investing in the long term. The volatility in March 2020 unnerved many investors whose first reaction was to exit their investments in haste. A closer look at data reveals that long term investments always outperform short term investments. For example, large-cap funds have delivered annual returns of 3% in three years and 7% in the five-year period. Similarly, small-cap funds have delivered annual returns of -4% in three years and 7% in the five-year period. The minimum returns for equity investment are -25%, -18%, and -1.60% for the period of three, five, and ten years respectively. Clearly, short term underperformance is outwitted by long term performance. The longer the holding period of holding, the better chance of higher returns.

The difference between lump sum and SIP returns does not have much differential. If one did SIP in NIFTY 50, his returns over a three, five, and ten-year period would be -22%, 2%, and 9% respectively. Similarly, a SIP in NIFTY Midcap 100 would have fetched an average return of 13.50% over three years and 13.25% over five-year period.  The minimum returns for NIFTY 100 would be -3.70% and 0.65% for a three year and five-year period respectively. There is not much difference between lump sum and SIP in terms of returns, but SIPs are a lot safer.  

The above example demonstrates that equity investments yield more returns over the long term. Long term investments experience lower volatility. This enables the investor to sustain low market periods. The investor also does not have to worry about falling stock prices because in the long-term stocks recover smartly. In the short term, the value of a stock can falls to near zero, but it has the potential to rise infinitely over the long term. 

The mutual fund industry is young. It has been in existence for 25-30 odd years, and most of the action has occurred in the past 10-15 years. Mutual funds are considered safe for investments. Many ends up with poor returns because either they have invested at a wrong time or in the wrong scheme. A good financial advisor can help you avoid the pitfalls of investing. Long term investments not only yield better returns, but they also offer a tax advantage. A long-term investment in debt funds offers indexation benefits to the investor. It also helps the investor to achieve his financial goals whether is it retirement savings or funding education for his child. For example, if one invests Rs 1, 00,000 in lumpsum and does a SIP of Rs 5,000 every month for 20 years, he would benefit through compounding. Assuming just a 10% annual return his total investment of Rs 13 lakh would fetch him Rs 46 lakh after 20 years. 

Remember, in the short-term markets will test the nerves of investors. It will test and force the weak hands to divest. A long-term investor has a chance to buy at healthier valuations and reap the rewards as it continues to grind higher over a period of time. The key to success is to have a plan and stick to it regardless of market levels.