In order to gain from compound growth, investors are frequently urged to make long-term stock investments. Understanding the power of compounding is crucial if one wants to fully appreciate the advantages of long-term investing. Compounding is akin to a multiplier effect in that it causes an investment’s value to increase at a multiplicative pace rather than an additive one since the interest that is generated on the initial capital also earns interest. The curve of growth and wealth creation is more pronounced the higher the rate of return. As an illustration, an investment of just Rs. 1 lakh made in year one at a rate of 10% and held for 20 years can compound to Rs. 6.72 lakh, yielding a remarkable return on investment of Rs. 672%.
Businesses operate primarily with the intention of making profits, and they work tirelessly to increase those earnings. However, during the process, their numerous techniques and choices are what shape their route to advancement. This characteristic separates the successful businesses from the unsuccessful ones, and the former from the former. The successful ones give their stockholders large profits.
Growth of a business is a slow process that depends on operational effectiveness as well as scalability. As investors, it is always important to research a company’s business model because management strategies can make or break a company’s route to growth. When running a firm, it is also crucial to maintain a macro view and consider a variety of elements, including governmental policy, interest rates, and stakeholder claims (including those of debt and equity holders), among others.
The second step is to evaluate the sector in which the company operates. In order to determine whether there will be enough demand for the company’s growth in the future, an investor needs consider how the industry will develop. For instance, the FMCG industry is a key theme that has had amazing growth. India is a developing country with promising growth prospects, especially due to the country’s urbanisation and the development of its infrastructure and people capital. The consumption of processed foods increased as the nation’s disposable income increased, which benefited businesses like Britannia. A 2010 investment in Britannia at a price of 196 pence per share would have yielded a return of 1940% in just ten years.
The company in that sector with good foundations would thus also benefit if all the cards are on the table if the industry is predicted to grow. As India’s economy continues to thrive on this theme, the corporation still expands based on its capacity and effective profitability.
The growth of HDFC Bank has also been successful. As banking has become more widespread in the nation, the financial sector has exhibited strong growth. Banking equities experienced significant inflows and experienced exponential growth as banking expanded and became more regulated. With an upward moving trend in its charts, HDFC Bank participated in this rally. Its revenues increased from ₹16,314 crore in 2010 to ₹1,22,189 crore in 2020, rising at a rate of nearly 25% CAGR, while the stock price increased from ₹210 per share to ₹1,385 per share, increasing by about 660% over the course of ten years, excluding company dividends.
Advantages of Investing in Long-Term Stocks
The benefits of buying long-term investments are numerous. Although the short-term investing objectives may seem highly alluring, the chances of success are below average. However, with long-term investing, this is not the case. These long-term investments not only assist you in maximising your gains but also offer you time to assess the market and remedy any possible investing errors.
1. Can invest for long term
Although the time frame may appear to be a term rather than a benefit, it is in fact a benefit. In the case of long-term stocks, the more time you hold them, the more rewards you can obtain. The stock market views time as money. Your success will be based on how long you’ve been involved in the market, regardless of whether you’re trying to accomplish a financial objective or a life goal. If you commit to investing for the long run, you can also gain from compounding. In order to assure the long-term future of the firm, these companies typically have good financials, clear view of long-term earnings, sustainable business growth, and significant cash on the balance sheet.
2. Perks of Compounding
The power of compounding may not be well known to investors who have only recently dabbled in the stock market. It is among the main advantages of buying long-term stocks. Actually, this is the fundamental tenet of long-term investments. And start investing early if you want to massively increase your profits.
After a few years, the results will no doubt astound you.
3. Helps in Maintaining a Diversified Portfolio
You may increase your gains in the stock market by diversifying your holdings, which is a crucial step. This is just another justification for choosing to invest in the top Indian long-term equities. The strategy of portfolio diversification is rather easy to comprehend. Let’s imagine you have 6 eggs altogether in one basket. What if you misplace your basket, though? You realise you’ll lose every egg? You shouldn’t put all of your eggs in one basket for this reason. The same idea applies to investments. With long-term investments, you have plenty of time to construct and organise your portfolio so that it is diversified.
We all love the SIP approach to investing – it averages out the cost of investing, and on top of it, the power of compounding continues the benefits if invested for the long term.
We have launched the US Stocks SIP feature in response to user demand. You can now invest as little as Rs. 500 per week or month in any US stock or ETF, including Tesla, Amazon, Apple, Meta, and Microsoft, among many others.
Best Stocks for 2022 (Long Term)
|Stock Name||NSE Code||Industry||Current Price (₹)||Market Cap (Crore)||P/E||ROE|
|TCS||TCS||Computers – Software||3,365||12,31,000||32||49.48|
|Hindustan Unilever||HINDUNILVR||Personal Care – Multinational||2,648||6,22,000||67.90||18.08|
|HDFC||HDFC||Banks – Private Sector||1,430||7,95,000||20.09||15.39|
Tips to Select the Best Long-Term Stocks
Follow the given tips to select the right stocks for your long-term investment:
1. Do Not Blindly Follow Hot Tips
No matter how reliable the source, never take a stock marketing suggestion at face value without doing your own in-depth study. Always choose your stocks after thorough investigation and evaluation of the firms’ and their employees’ performance. While some advice may prove to be of great value to you, the incorrect advice may swiftly put you into danger.
2. Eliminate Loser Stocks from Portfolio
A stock’s eventual recovery after a steep decline cannot be predicted at all. Recognize that it is crucial to be realistic about what is achievable and what is not in the stock market. Therefore, admit your error and sell the underperforming stock as soon as you realise it is part of your portfolio to stop additional losses.
3. Don’t Exceed Your Investment Budget Abruptly
Although long-term investments are undoubtedly superior to other types of investments, you shouldn’t overspend your investment budget hastily. Instead, pick a specific sum and spread it among several reputable stocks. Spend your money evenly across several high-performing stocks and shares rather than just one stock.
4. Donʹt Give More Importance to P/E Ratio
Most novice investors overemphasise the P/E ratio when choosing long-term companies, which is a bad strategy. Instead, when choosing the best stocks, take into account additional factors like Return on Equity, Market Capitalization, Net Worth, Past Performance, etc.
5. Choose an Investment Strategy and Stick to it
There are various ways to choose stocks, but it’s crucial to pick a strategy and stick to it if you want to make the best choice possible for your goals and objectives.
For the best decision, conduct a thorough fundamental and technical study and employ stock screeners.