I recently met a friend of mine, Bhavin who asked if it would be best to buy and hold an equity investment for the long term as he wanted to leave behind a legacy for his son.
Bhavin told me that his father had made some equity investments a few decades back, that too in high-quality businesses such as Infosys, Wipro, HDFC and Reliance Industries but sold them off for just 50-100%. Bhavin was disappointed with the fact that his father sold off these fundamentally sound businesses prematurely, thus losing out on the massive gains which his father would have made if he still held those stocks.
Just like Bhavin, there are many investors who feel that buying and holding an equity investment for the long term is the best way to create wealth.
Few benefits of buy and hold of Equity Investment in India are as follows:
When you buy and sell equity investments in India, frequently you end paying a lot of charges in the form of brokerage as well as taxes like STT. On the contrast when you buy and hold equity investments in India, you will incur the charges only 2 times i.e. the first one when you buy, and a second time when you sell.
Qualifies for lower taxes
Long-term capital gain is taxed at lower rates i.e. 10% as compared to short-term capital gains (taxable at 15%) on equity investments in India.
Power of compounding
Buy and hold strategy in equity investments is a proven technique to generate substantial returns by investing in fundamentally sound businesses. When you invest for a long term in solid businesses, the magic of power of compounding comes into play. This multiplies your wealth over the long run, thus helping you generate wealth from your wealth even while you sleep.
Stock markets are a lot volatile over the short term. This is primarily because they are driven by investor’s sentiments which are hard to predict. However, in a long run, the fundamentals take over, and the corroborative effect of the strength of your equity investment is reflected in the stock price.
Let’s look at the chart that explains the relationship between time and risk.
As you can see, the risk reduces and is almost 0, if invested for a long term in quality businesses.
By using Buy and Hold strategy while investing in equity investments in India can also help you to avoid timing the market and mitigate the risks, which are higher over the short term.
However, can anybody create wealth by using the buy and hold strategy in equity investments?
The answer is simply no. Buy and hold strategy is a good strategy for wealth creation only if you pick the right investments. Along with the thorough research while investing in equities, it is equally important to monitor your portfolio, rebalancing the portfolio against risk, portfolio diversification and allocating the assets by understanding the different asset classes and sectors.