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Reasons to stay invested in equity

ICICIdirect 7 Mins 29 Sep 2023

Most investors invest in equities for the returns. However, investors need to change their mindset. Only then can they think long-term. Look at equity investment as a 'company ownership.' You are not only investing in the company. You also take ownership of the company - partial ownership. With this mindset, equity investment becomes relatively easier for investors. Every individual knows which kind of company they want to own and run.

The question we are answering today is whether equities should be in your portfolio.

In today's article, we will look at the top 7 reasons to stay invested in equities all the time.

Reasons to stay invested in equities all the time

Every story has two sides. The same is with equity. Yes, they are volatile asset classes, and the uncertainty can be unsettling for most investors. However, the long-term benefits of staying invested in stocks outweigh the risks and fears. Let us look at the top seven reasons why equity should be part of your portfolio all the time:

Reason 1: Historical data supporting returns

Let us admit that we take higher risks because we want higher returns. Even though risky, equity investment has given better returns to investors in the long term. We need to mention that past performance is not indicative of future returns. However, the track record suggests equity has the potential to provide you with significant returns over time.

Reason 2: Power of Compounding

Do you know the eighth wonder of the world? It is the power of compounding. We are not saying it. Albert Einstein has said it, and we stand by it. When you stay invested in equities, you give your investment the power to compound. As your investment grows, it generates returns, which, in turn, generate additional earnings for you. With time, the compounding effect can substantially increase your corpus. If you invest Rs 4 lakh with returns of 12%, you get Rs 12.4 lakh (three times) at the end of 10 years. However, if you increase your holding period to 15 years, you get Rs 21.89 lakh (5.5 times). Are you able to see the magic?

Reason 3: Opportunity to Diversify

Bonds and gold are good investment options. However, investors need to diversify their portfolios, and equities give you variety. There are thousands of companies listed in India across different sectors and markets. Not only this, but you can also invest in international funds and stocks. When you invest in a mix of stocks from different sectors and industries, you spread risk and reduce the impact of poor performance in any company or sector. Even though risky, equity investment helps you create a stable portfolio.

Reason 4: Protection against Inflation

Inflation erodes the purchasing power of your money over time. You don't need to be a financial expert to know this - check how much your grocery bills have increased in the last few years. You will understand that inflation is a real threat to your money. Equities have the potential to outpace inflation, allowing you to maintain or increase your wealth in real terms. While inflation may diminish the value of cash and fixed-income investments, equities often act as an effective hedge.

Reason 5: Dividend Income

Many companies pay dividends, which provide a consistent income stream for you. Once you have created a decent-sized portfolio, you can expect a reliable source of cash flow, making equities an attractive option for income-oriented investors, particularly during retirement.

Power 6: Emotional Stability

Staying invested in equities can help you avoid the emotional roller coaster of market timing. No one can time the market. The best thing to do is not to predict market movements. Jumping in and out of the market can lead to costly mistakes. You can sidestep the stress and anxiety associated with short-term market fluctuations by staying in the game. 

Reason 7: Lower taxes for long-term investments

The taxes on equity investments are nominal. If you invest in the stock market for a short time (less than a year), you pay a 15% tax on your gains. When you stay invested for over a year, the capital gain tax is only 10%. Unless you sell your investments, you don't need to pay any tax to the IT department.

Before you go

Looking to create wealth? Stay invested in equities all the time, as it is a prudent and rewarding approach to wealth building. While stocks may experience short-term volatility, their historical growth potential makes them a compelling choice for long-term investors. Equities can play a vital role in achieving financial security and meeting your long-term financial goals. However, you must align your investment strategy with your risk tolerance, financial objectives, and time horizon. 

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