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    Do Long Term Investments Provide Better Returns?

     Do long term investment options provide better returns

    Do Long Term Investments Provide Better Returns?


    calender-blue

    May 29, 2020

    By : Bajaj Allianz Life

    Investments are an essential part of financial planning. With the prices of everyday goods and essential services steadily increasing, merely saving your income won’t be sufficient anymore. What you really need to focus on is investing your money, so it can grow exponentially over the long term. Now, if you’re planning to invest in any one or more of the many financial investment products available to Indian investors, it becomes important to choose between short-term and long-term investment options that suits your needs.

    Are there long-term investment options that provide for tax saving investments? Do long-term investments provide a higher return on investment? These are some of the important questions you should look into before making an investment decision. To understand more about the way long-term investments work, let’s get back to the basics.

    What are long-term investments?

    Long-term investments are financial products that are developed to help your money grow over a longer period of time. These are investments that you hold for much longer than a year or a few years. The return on investment from these assets are generally higher, primarily because of the duration of investment. In other words, since your initial investment has more time to grow, it grows larger.

    For instance, land is a long-term investment option that’s quite popular. Most people tend to hold the land they’ve purchased for several years before selling it off for a handsome profit. If you’re looking for a financial asset that makes for a long-term investment option, ULIP Plans are one such option available in the market, with a lock-in period of 5 years. Considering the fact that life insurance is a long term product, investors might not be able to enjoy the complete benefits of ULIPs unless they stay invested for a long term which can further help you save dedicatedly for your long-term financial goals.

    Long term-investments and the power of compounding

    One of the primary advantages of long-term investments is that they help your money grow through the power of compounding. In simple terms, compound interest is basically interest calculated and accrued on the interest your investment earns. This interest-on-interest eventually adds up to a corpus that is higher than what your capital would have grown up to with simple interest alone. Here’s an example to elucidate this difference.

    Say you invest ₹1,000 in an investment product. This is how your money will grow over 5 years with simple interest at the rate of 5%.

    Year

    Principal (₹)

    Interest (₹)

    Total investment value (₹)

    Year 1

    1,000

    1,000 x 5% = 50

    1,050

    Year 2

    1,000

    1,000 x 5% = 50

    1,100

    Year 3

    1,000

    1,000 x 5% = 50

    1,150

    Year 4

    1,000

    1,000 x 5% = 50

    1,200

    Year 5

    1,000

    1,000 x 5% = 50

    1,250

    And tabulated below is how it would grow with the power of compounding.

    Year

    Principal (₹)

    Interest (₹)

    Total investment value (₹)

    Year 1

    1,000

    1,000 x 5% = 50

    1,050

    Year 2

    1,050

    1,050 x 5% = 52.50

    1,102.50

    Year 3

    1,102.50

    1,102.50 x 5% = 55.13

    1,157.63

    Year 4

    1,157.63

    1,157.63 x 5% = 57.88

    1,215.51

    Year 5

    1,215.51

    1,215.51 x 5% = 60.77

    1,276.29

    So, you see, with compounding, your money grows significantly over the same period, thus enabling them to provide better returns in the long run.

    Other benefits of long-term investments

    In addition to compounding, long term investments also offer many other benefits, as explained herein below.

    • They guard against volatility

    Volatility is the degree to which the prices of an asset fluctuates over time and increased volatility creates increased risk of investments. Long-term investments generally show less volatility when compared to short-term investments. Due to volatility, the prices of an asset fluctuates over time. With long-term investments, you can use market volatility to your advantage. You need not get worried about any short-term market fluctuations, and instead, you can use that low patch to add in more capital to your long-term market-linked investments.

    • They help you create lasting wealth

    Long-term investment options help you create long-lasting wealth. On the other hand, if you have a long-term life goal in place, you’re likely to stick with the investment for a longer period, thus enjoying better returns.

    • They offer tax benefits

    Many long-term investments like ULIPs are eligible for tax benefits under different sections of the Income Tax Act 1961. For instance, the premium paid for a ULIP Policy is eligible for deductions under section 80C of the Income Tax Act. So, the longer you remain invested, the more tax benefits you can claim. Also, the maturity value (or death benefits) from many long-term investments like ULIPs are tax-free under section 10(10D) of the Income Tax Act. The above mentioned exemptions and deductions are subject to the provisions stated under the Act.

    • They allow you to make goal-based investments

    You can use long-term investment plans to plan and achieve different life goals at varying stages of life. With smart planning, you can time your long-term investments in such a manner that they provide you with finances when you need the most. Thus, long-term investments allow you to achieve different life goals such as paying for your child’s higher education, meeting their wedding costs, and building a corpus for your retirement.

    List of long-term investments you could have and why

    To help you get started, here’s few options which may form part of an illustrative list of some long-term investments you could add to your investment portfolio to achieve your Life Goals and secure your loved ones.

    • Unit Linked Insurance Plans (ULIPs): You get the advantage of insurance as well as investment.

    • Life insurance: If you’re looking for a way to secure the future of your family, save taxes in the process, a life insurance plan fits the bill.

    Conclusion

    So, to wrap it up, investing in long-term investment products can help you realise your life goals with the return on such investments, primarily because of the power of compounding. For this, you need to ensure that you have planned well and have stayed invested for a longer duration to be able to get your life goals done.

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