There are two types of investment. One is long-term investment and the other is short-term investment.
Intra day trading or trading within a week is not short-term investment but its trading only.
Before going further, we should keep in mind that technically the investment which is held for more than one year is called long term investment. According to my view, the investment will have benefits of long-term investment if the investment is held minimum for three years or more. As the time period of investment rises, the benefits of that investment raise too. Long term investment may be up to 15-20 years and so on.
Return on investment is affected mainly by two factors: Volatility and Stability.
These both words affect every investment but in long-term trend we must study the trend of volatility and price-stability.
Volatility directly affects any investment. Highly volatility means higher risk in investment. Some securities tend to be highly volatile in intra-day or in short time span, but it shows growth and stability in long-term patterns. Some investments fluctuate highly in short time span but can maintain purchasing power in long-term. Hence, short term volatility is not indication to study long-term patterns.
Volatility and time has reciprocal relationship. Longer the time spans, lower the volatility of investment and vice versa.
Benefits of long-term investments
- Profit on long-term investment is long-term capital gain. Long-term capital gain is taxed below regular income tax bracket. While short term capital gain is taxed as per regular income tax bracket. Long term capital gain from some sector specific Mutual Funds like investment in infrastructure or hydro power generation etc. are exempted from income tax.
- You can save transaction costs in long-term investment over short-term investment. Some Mutual Funds waive the selling charges if you hold the investment for a long period.
- For some future goals like retirement plan, pension plan, marriage of children, higher education of children etc, you must think of long-term investment only.
- Long-term investment provides you benefit of compounding. If you choose growth oriented Mutual Funds, the earnings/dividends from such mutual funds are re-invested. The longer your investment be, the more your re-investment of earning be which can earn more than your contribution alone.
- Long-term investor is never spooked by downturn of market. Such investor never tries to time the market and reap benefits when the market rebounds.
- Long-term investor can get benefit of each decline of market. If you invest per month some amount, You can buy more shares or units of mutual fund when prices are low and you will buy fewer when prices are high. You can get benefit of frequent market corrections.
- Long-term investor always enjoys tension free life because he/she never feel panic when market decline and he/she never runs to sell his investment.
- A common investor who is not expert in market trends can benefit from long-term investment.
- Any person can make mistake at some point. But long-term investor can correct his/her mistake.
- Long-term investor can reduce investment risk by removing lost opportunities.
- Long-term investor can make diversified portfolio.
- Long-term investment allows the ability to exploit opportunities arising from the actions of short-term investors.
- Developing country like India is sitting on beginning point of achievement. Indian economy will surely reach the levels of America and Europe. So long-term investors of India will surely get huge benefits from long-term investments.