What are long term stock investments?
Long-term investments, such as in stock markets, can be a great way to build wealth and achieve financial stability. Long-term stock investment refers to holding onto securities, such as stocks and bonds, for more than a year. Such investments can offer several benefits, including the potential for long-term growth, diversification, and a steady source of income through dividends.
In this blog, we'll explore the different types of long-term maturity investments and their benefits.
What are long-term investments?
Any investment you hold for more than a year is known as a long-term investment. Typically, investments that are held for several years, largely outperform the market. The asset could include anything from stocks to bonds to mutual funds.
Such investments serve the dual purpose of protecting your capital and helping you earn high returns. These investments are generally considered less risky than short-term investments, as they provide a longer time horizon for the investment to grow.
Types of long-term maturity investments
Long-term maturity investments are financial assets that have a maturity period of more than one year. These types of investments are generally considered less risky than short-term investments, as they provide a longer time horizon for the investment to grow.
When investing for the long term, you need to consider several factors. These include your age, risk tolerance level, and investment goals. Here are some thumb rules you can follow to select stocks when investing for the long term:
Index funds track a specific index, such as the Nifty50, and are traded just like any other stock. These funds, however, come at a lower cost and save you the trouble of handpicking companies. The return on index funds are comparable with that of the index it is tracking.
While you hold the stock for the long term, it helps to invest in stocks with a history of paying dividends. This can make your portfolio more valuable, especially when you reinvest those dividends in the stock.
Stocks with a track record of high growth may continue to generate revenue faster than other stocks. Plus, these stocks often generate comparatively better financial reports. However, these stocks are also risky compared to other stocks.
Who should go for long-term stock investing?
Investing in long-term stocks must be based on your age, risk profile, investment goals, risk tolerance, and the amount of capital you have. There are various options available, including securities from both large and small- to mid-size businesses.
For example, if you want a stable source of income and protection of your investment capital, you may choose to invest in stocks of companies with a market capitalization of at least Rs 20,000 crore or more. These companies tend to be well-established and not as affected by market fluctuations as smaller companies, thus providing a lower level of risk.
On the other hand, some investors may be more focused on achieving capital gains through their investments. In this case, they invest in stocks of small and mid-size companies, which have the potential to give higher returns. However, these stocks come with higher risks.
Why should you invest in long-term stocks?
The following are some benefits of long-term stock investments:
Potential for long-term growth:
Investing in long-term stocks allows you to hold onto your investment for an extended period, providing the opportunity for long-term growth. As companies grow and mature, their stock prices can also increase, resulting in capital gains for investors.
Investing in stocks for the long term can be a good way to diversify your investment portfolio. By spreading your money across different types of stocks, you can reduce your risk and increase the chances of earning a return on your investment.
Potential for dividends:
Some companies pay dividends to shareholders, which can provide a steady source of income. This can be a good option for investors looking for a more stable return on their investments.
Potential for compounding:
When you reinvest your dividends or capital gains, you can earn compounded returns on your investment. This means that the returns on your investment generates more returns, which can help grow your investment over time.
Hedge against inflation:
Investing in stocks for the long term can help buffer your purchasing power against inflation. As the prices of goods and services increases over time, typically, the value of your investments too, increase, which can help offset negatives such as inflation.
Investing in growth:
Investing for the long term in stocks of companies that have a good growth potential can provide a great return. These companies have solid management, strong financials, and a good product or service that will be in demand in the future.
While long-term investments can help you ride out times of high volatility and help you fight inflation, they come with several risks. Some risks of long-term stock investments are the possibility of losing money and market fluctuations.
It's important to undertake your own research and have a good understanding of the companies you're investing in. Also, it's important to have a diversified portfolio, with a mix of short-term and long-term investments to minimize the risk.
Q. What are the tax benefits of holding a stock for the long term?
Long-term capital gains tax is lesser than short-term capital gains tax at 10%. Plus, the gains are tax-free up to Rs 1 lakh.
Q. How long do you hold a stock for it to be considered long term?
You must hold a stock for at least 12 months before your investment can be considered long term.
Q. What are the top sectors to consider for long-term investment?
The following sectors are the best for long-term investments: Fertilizers, BFSI, IT, FMCG, and Consumer goods.