Why Investing In Equity Makes Sense If You Have A 5 Year Time Horizon?

24 Jul 2019by Research and Ranking

Why Investing In Equity Makes Sense If You Have A 5 Year Time Horizon?

The best way to grow your money is to invest in equity for long term. On the other hand if you invest in equity for a short term there will be lot of things working against you. In short periods of time the stock market is highly volatile and if there is a market correction, you may have to exit at a loss as your investment horizon is short.

When you are invest in equity for long term, preferably 5 years or more you are essentially giving time to the businesses to grow and realize their true potential for long-term success. This way you can ignore any short term volatility and use it as an opportunity to invest more at discounted prices.

Traditional investments like bank fixed deposits and post office deposits are unsuitable for long term investments due to falling interest rates over the last few years. Besides this if you consider the rate of inflation, the real rate of returns are very low.

If you look at the history of stock markets in India, stock markets have always followed the movement of GDP.

India's nominal GDP in dollar terms which was around $388 billion in 1996, doubled to touch $920 billion in 2006. Over the next 10 years by 2016 it again more than doubled to $2.3 trillion. Even if India's real GDP grows as per the predicted growth rate of around 7.5 per cent in rupee terms for the next five years, it can easily cross the $5 trillion mark by 2024.

It is a proven fact that when an economy grows substantially, businesses will report better earnings and growth. So we can safely expect anywhere between 4 to 5 times returns over the next 5 years.

Check out the growth trajectory of Nifty below:

The Best Way To Create Wealth Is To Invest In Equity For Long Term

The above table proves that for wealth creation it is best to invest in equity for a time horizon of 5 years or more. The way our parents and their parents invested decades back in bank fixed deposits, PPF, Kisan Vikas Patra etc. was probably right at that time, given the high interest rates back then. But times have changed. That’s why with changing times, one has to change his investing style too.


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