Personal Finance

Why Should You Stay Invested For The Long Term?

June 1, 2020

Why Should You Stay Invested For The Long Term?

As an investor, the daily fluctuations in the NAV of your mutual fund might have left you to wonder whether or not should you stay invested. Research has shown that those who stick to their investment timelines are likely to achieve their goals as compared to those who do it otherwise. A long term approach not only helps your mutual fund to realise its full potential but also provides you with a number of other benefits.

Let’s have a look at some of them.

Face Lower Volatility With Optimal Returns

Volatility refers to the ups and downs that might occur in the value of your mutual fund portfolio over a period of time. The level of volatility depends on the type of fund that you have invested in. In the case of equity funds, volatility tends to be higher in the short term because of the constant fluctuation in the stock prices in which these funds have invested your capital.

At this point, you need to remind yourself that these are not actual losses but only notional in nature. When you decide to stay invested for a longer horizon, these fluctuations smoothen out to bring your portfolio back in the green. Besides, you also allow compounding to operate on your monthly SIPs that lets the interest earned to be reinvested to earn additional interest.

For instance, assuming an annualised return of 12% and an original investment horizon of 10 years, a monthly SIP of Rs 10,000 when done for an additional 5 years can make a difference of around Rs 27 lakh in your overall accumulated corpus. Thus, you end up with a lot more wealth for your goals than you could have created in the short run.

Achieve Bigger Financial Goals With Ease

A longer horizon opens up opportunities for you to dream big and achieve bigger. When you have got more time by your side, you are in a better position to plan your investments alongside your income streams. Instead of putting a big lump sum at stake, you can break the bulk and start investing with smaller SIPs that are spread over a bigger time frame. This takes away the burden associated with investing and makes it easier for you to get into the habit of saving and investing regularly for your goals.

For instance, if you wish to build a corpus of Rs 50 lakh over a 15-year period, then a monthly SIP of Rs 10,000 would be good enough to achieve that. However, when you shorten your investment horizon by 5 years, you would need to invest a bigger SIP of Rs 21,600 to accumulate the same amount.

Additionally, you can do away with the stress of tracking each and every movement of the market. Such a discipline enables you to adjust the amount of your SIPs as and when your goals expand in the future.

Receive Tax Benefit On Capital Gains

When you remain committed to your investments, you tend to gain higher on two fronts- compounded returns and reduced tax liability. As per the Income Tax Act 1961, long term capital gains are taxed at relatively lower rates as compared to short term gains.

In the case of equity funds, for tax purposes, the long term refers to a period of more than 1 year from the time of your initial investment. Hence, when you stay invested beyond a period of 1 year in equity funds, your gains of up to Rs 1 lakh are tax-free in your hands. Gains over and above Rs 1 lakh are taxed at the rate of 10%.

For instance, if you have made long term gains of Rs 1.5 lakh from an equity fund, then your gains of Rs 1 lakh are considered tax-free and you need to pay tax only on the remaining amount i.e. Rs 50,000.

Similarly, in the case of debt funds, the long term refers to a horizon of more than 3 years from the time of your initial investment. Thus, when you stay put in a debt fund for over 3 years, your long term gains enjoy the benefit of indexation and get taxed at a rate of 20% (including the relevant cess). With indexation, your initial investment gets adjusted to include the effect of inflation such that you get to pay a lower tax on your overall gains.

Conclusion

Be it life or investments, it pays to stay committed. When you invest in mutual funds with Paytm Money, the fully digital KYC and convenient SIP management make it easier to stay invested and achieve goals in a fast-paced manner.