Tips For The Successful Long-Term Investor

Tips For The Successful Long-Term Investor

A long-term investor is a person who is ready to take any investment associated risks and be patient for a longer period, to earn potentially high rewards. With the long-term investment, the capital gain from your portfolio increases and meets your goals after a few years. While planning an investment strategy, it is best if you mix long-term and short-term investments in your portfolio. But being a successful long-term investor is not easy. You need to keep a lot of things in mind before investing.

Long term investment is a strategy that allows you to grow your capital by investing in assets that are safe and you can invest freely for a longer time horizon. The chances of earning high returns are associated with long term investments but at the same time are prone to risks. There are generally nine types of risks associated with the investment. These are –

  • Market Risk – The reduction in the value of the investment due to an economic change or other reasons affecting the market. This is further categorized as Equity risk for investment in shares, interest rate risk arises during investment in debts and currency risk for foreign investments.
  • Liquidity Risk – You may not get a fair price for selling your investment at the time of need and you need to sell it at a lower price. This is liquidity risk.
  • Concentration Risk – When your portfolio is concentrated on a single investment, this risk arises. You need to diversify your portfolio into 2 or more investment options.
  • Credit Risk – This risk is associated with investing in debts like bonds. The government or a company may not be able to pay the interest or the amount borrowed due to a crisis. Credit risk can be evaluated by checking the credit rating.
  • Reinvestment Risk – This risk arises when you are reinvesting the principal at a lower rate of interest
  • Inflation Risk – This risk is associated with market inflation. You lose the purchasing power as the investment values cannot cope up with the inflation.
  • Horizon Risk – The horizon of your investment portfolio may be affected due to some unforeseen events. At some times, you may sell your investment at lower prices resulting in a loss.
  • Longevity Risk – This risk is associated with retired people or is about to retire. The savings get outlived under certain circumstances.
  • Foreign Investment Risk – This occurs if you are purchasing foreign investments.

Investing in long-term investments is less time taking as the investors do not need to monitor the small fluctuations in the market.

Few tips to become a successful long-term investor

  1. Set your financial goals – You need to set your purpose of investing. Then estimate the amount needed and the time you have in your hand. This will help you to understand how much you need to invest and for how long to create the required corpus.  Most importantly you must consider your current income strategy.
  2. Start investing at your 20s – You need to start investing early when you are capable of earning more and take large risks. In the long run, the investment corpus increases to a bigger one with lower investments.
  3. Invest in Equity Funds – They offer some benefits like professional fund management, adequate portfolio diversification, and low-cost investments. If you want to save income tax, then invest in ELSS. It is a tax-saving mutual fund.
  4. Build an emergency fund – While investing for the long term, you must have an emergency fund that will help you financially during a sudden need without affecting your investments. You don’t need to sell your long term investments during a crisis at a huge loss. The emergency fund will serve the purpose.
  5. Investment Risks – clearly understand the risks associated with the investment and invest only if you are ready to face the risks anytime.
  6. Diversified portfolio – Keep your portfolio well-diversified into more than one investment option. This will reduce the risks, and balances the loss and gain in returns.
  7. Look into the costs of investing –  Costs of investing affects your gain and loss from returns. It reduces the gain and increases the loss. The two main fees include the fund expense ratio that you need to pay annually to run your fund and the financial advisory fees. Besides this, there are some other small fees associated with your investment fund.
  8. Invest according to a strategy and keep reviewing it regularly –  Make a strategy about how you are going to invest and for what time horizon. Regularly check the strategy and make adjustments according to your need. You need to update your holdings.
  9. Proper research – You must do proper research and then invest in the funds. Make comparisons, analyze which one is better for you, look into the performance, return rates, and risks associated.
  10. Take an expert’s advice – Learning the terms and conditions is very necessary. This may not be easy for a normal man and therefore it is better to take an expert’s advice and understand clearly everything as much as possible.

Some of the best long term investment options

  1. Unit Linked Insurance Plan (ULIPs) – Under section 80C and Section 10(D), one can get a maximum tax deduction of Rs 1.5 lakh. This can meet several financial goals like your child’s education or marriage, down payment for a house, or a retirement plan.
  2. Equity Funds – Under Section 10(D) a tax deduction of maximum Rs 1.5 lakh is offered. For more tax benefit, you can choose tax-saving mutual funds which are also known as Equity-linked savings schemes (ELSS).
  3. Public Provident Funds (PPF) – This is best for individuals who can take less amount of risk to save money for long term financial goals like retirement planning.
  4. Stocks – They are associated with high risks, and may not guarantee you any gain in returns.
  5. Mutual funds – This is for the people who can invest both in bonds and equities, thereby balancing both the risk and return.
  6. Bonds – One can find stocks are more risky investment options, for a safer option you can invest in bonds.
  7. Gold – You can invest in gold bars, gold schemes, gold ETF, gold mutual funds etc that are having a certain lock-in period.
  8. Real Estate – Investing in Real Estate is the best long term investment option for today’s youth.

Others include Exchange Traded Funds, National Pension System, Retirement plans,

Conclusion

If you are intended to invest in long-term options then stay focused towards your financial goals and don’t get distracted or frustrated with the market change. Stay calm and follow the tips tactfully. Don’t let small things affect you, always look into a larger picture. If you want to enjoy high returns then you must have the ability to take risks.

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