What Should We Do For Successful Long-Term Investment?
Short-term investments focus on capital preservation while long-term investments focus on wealth creation. An ideal investment portfolio is a good mix of both short-term and long-term investments.
Usually, fixed-income instruments are preferred for short-term investing as they protect our capital. But, in a low-interest regime, returns from fixed income instruments are usually insufficient to beat inflation.
Market-linked instruments, on the other hand, can generate high inflation-adjusted returns. Some non-financial assets like real-estate can give inflation-adjusted gains too.
Some asset classes that you can choose for successful long-term investment are listed below.
Long-term investments
- Stocks or Direct equity
Stocks are one of the most popular long-term investment options. Stockholders get ownership rights in the issuing firm and a share in the firm’s profits along with some special privileges.
Stocks or shares are mainly of two types – Growth stocks and Dividend stocks.
Growth stocks reinvest the profits generated. Thus, they have high wealth generation potential. Apple stock is a good example of a growth stock. In the 90s, we could buy an Apple share for merely $1. Today, it is worth $134. Thus, an individual who would have invested $100 back then in Apple stocks would have earned $13400 today.
Dividend stocks, on the other hand, distribute profits as dividends to shareholders in proportion to their ownership. They are useful for generating intermittent income flows. Dividend stocks are less volatile than growth stocks. In other words, they are less risky than growth stocks. They are also useful for capital appreciation but the rate of growth of capital is lower than that of growth stocks. For example, Cox & Kings stocks currently pay a high dividend yield of 74%.
Depending on your financial goals, liquidity needs, and risk-return profile, you can either choose growth stock or dividend stock. But, stock investments, in general carry substantial risks and are marred by uncertainty.
Remaining invested in stocks for the longest possible time maximizes stock market returns. Stock market risk can also be hedged with derivative instruments like stock futures and options. Blue chip stocks are good choices for investors with low-risk appetite and less knowledge of the nitty-gritty of stock trading.
- Mutual Funds (MFs)
MFs are professional managed investment funds that pool money from many investors and invest the money in different asset classes. In short, MFs help investors in minimizing investment risks by holding a diversified portfolio. They are also good long-term investment options.
MFs are of three types. They are as follows:-
- Equity funds: Majority of the pooled money is invested inequities. They are the riskiest MFs with high return potential.
- Debt funds: A major proportion of the pooled money is invested in bonds or debt securities. They are low-risk low-return MFs.
- Hybrid funds: The pooled money is equally distributed among equities, bonds, and money market instruments. They are moderate-risk moderate returns MFs.
Depending on individual goals and investment styles, investors can choose any type of MF for investment.
You need a demat and trading account for transacting in stocks and MFs. A Demat account is an electronic repository of your physical securities whereas a trading account is essential for transacting in the secondary markets.
Many brokerage firms allow investors to open free trading account. Alongwith the demat account, the free trading account needs to be linked to our bank account for successfully trading in stock markets, MFs, and derivatives.
- Other long-term investment options
- ULIPs: ULIPs is a wealth creation tool that also provides a life cover. Similar to MFs, there are different types of ULIP funds that invest in different asset classes in varied proportions. You can choose the fund as per our risk return profile.
- Gold ETFs: Gold ETFs are most suitable for investors who wish to hold the yellow metal in dematerialized form. They also have a good long-term value and can be traded like stocks. They track the current domestic price of gold.
These were some instruments that can generate substantial inflation-adjusted wealth in the long-run. Investors can choose to invest in any or all of these depending on their risk-return appetite and financial objectives.
