The equity market has gone through numerous cycles over the years. From being deemed as a myth to being one of the quintessential investment options around, the journey has been a breathtaking one. People are now embracing the fact that equity investment does give better returns than any other investment plans like fixed deposits, gold and more and are venturing into it. Historically saying, investing in equity for the long term will help generate the best return.
This brings us to the word long term investment. We’ve heard of people rave about long term investments and all. We’ve seen how every news and media promotes you to go for the long term plans in the equity market. But what exactly is the long investment? And how long should be your long term equity investment? These questions are quite pertinent and something which has been asked around for long. Is there a definitive answer to these questions? Let’s find out.
What is Long Term Investment?
Generally, long term investment means an investment that is held for an extended period of time. But that’s a mere vague term. What does long term holding mean? Thre are different perspective regarding this and a lot of has been made of the complexities brought up by it. If you were to look at the taxation perspective mandated by the Income Tax Act, 1961 then long term investment differs from one asset to others. For say, listed shares held for over 12 months will constitute a long term investment while unlisted shares need to be held for 24 months to be counted as long term investment. similarly land needs to be held for 24 months while debt-oriented funds need to be held for over 36 months. Here’s a snippet of this one down below.
Long term investments if held for more than 12 months
- For securities listed in the recognized stock exchange
- Zero-Coupon bonds
- Unit of equity-oriented fund/ UTI
Long term investment if held for more than 24 months
- Unlisted shares
- Land or building or both
Long term investment if held for more than 36 months
- Unit of debt-oriented fund
- Unlisted securities other than shares
- Other capital assets
Based on the aforementioned mandate it means that long term equity investment refers to stock held for over 12 months. But that’s for the taxation part. Looking at the same via an investment strategy, what would mean long term investment and how long should it be, seem to fetch a different scene. We’ll follow with that down below.
How ‘Long’ should be your Long-term Equity Investment?
There are different aspects as to how we can interpret the long term investment. We can deem long term investment based on the financial goals and also based on the market returns. We here take a different route with a different perspective towards long term equity investment. Read along.
The Viewpoint from Financial Goals
Let’s first start with the logic behind the long term investment. The major reason behind the investment is to let your wealth grow over the long term. And why do we need to grow our wealth? Is it down to the financial goals of ours? Each one of us has financial goals and we intend to fulfil them. It may be anything like buying a dream car or a dream home or even looking forward to retirement. You’ll need a substantially good amount of money for your financial goals to be fulfilled.
For say you need around Rs 10 lakhs for your dream car and you’re willing to invest around Rs 10000 per month for the same. Taking the compounding rate of 15%, at the end of 5 years, your corpus will be around 9.5 lakhs. Similarly, if you opt to invest Rs 15000 a month, then taking into consideration the interest rate of 15%, you’ll have Rs 10.59 lakhs at the end of 4 years. If you compare this to your financial goals on buying your dream car, your long term investment will be 4 years or 5 years. If you look through this perspective it’s up to your investment goals and investment plan which will decide how long you should hold your investment for.
The Viewpoint from the Market Returns
The equity market tends to be dynamic in nature and is something that fluctuates with time. This is what often puts people away from investing in the equity market as they are fearful of the equity market. But over the years, looking back, the equity market has given great returns. The thing about the equity market is that you’ll need to have patience and look or overall growth spread over a period of time rather than opting for the short term gains. We’ve all heard of short term trading like intraday trading, the weekly trades that help to realize quick profits, but you should be clear on your motive as long term equity investment is more about seeking wealth growth over a period of time biding patiently.
We here look at the aspect of returns in the equity market over the years and seek what fits the bill of the optimum period for long term investment. Looking back over the Compound Annual Growth Rate (CAGR), the returns for 3 years stand as 8.56% for the large-cap funds and the 5-year CAGR for the same is 8.32%. Similarly the 10-year stats for equity market are 8.87%. And if you are looking at the 15 years stats, the CAGR comes across as 14%-15% for the equity market.
Looking back at the aspect of long term investment based on market returns then the longer you opt for the investment greater are the chances for generating high returns. It’s often said that the equity market delivers in the long run and the value substantially increases over time. Rather than seeking net returns, it is advised to go for the average returns as that will depict a clearer picture of your investment. It is advised to hold your investment for over 5 to 10 years for the long term equity investment.
The long term investment is something of a persistent thing and it doesn’t have an entirely clear answer to it. The periodicity for investment to be counted as long term differs from one aspect to another. Income Tax Act implies a stock investment of over 1 year as long term investment. But looking from the viewpoint of investing in achieving financial goals, the time period is much larger. Also if you seek the historical returns and base your investment on that, you’ll have a different number with you. The best advice is to go for anywhere between 5 to 10 years and the longer it goes, the higher the chances of your wealth growing multifold.
Note: All information & data provided in this article is for the educational purpose as well as to give general information on the investment and wealth management, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.