What Are Long Term Stocks?
Long term stocks are securities that are suitable for long-term investment and serve the dual purposes of capital preservation and return generation. These investment instruments are designed for both risk-tolerant and risk-averse investors. Small, mid sized, and large cap stocks can be considered for long-term investments.
While large-cap firms (those with a market capitalization greater than Rs. 20,000 crores) are chosen by investors seeking significant dividend yields and capital preservation, small and mid cap companies potentially enable individuals to enjoy big profits via long term capital gains. However, It is pertinent to note that high returns are followed by high-risk factors.
Types Of Long Term Investment Stocks
1. Blue Chip Stocks or Large Cap Stocks
The term “blue chip” originated from the game of poker and is used to describe top stocks. In poker, blue chips are the most precious, ranking above white and red chips. Similarly, blue chip equities are regarded as the most valuable on the stock market.
Blue chip stocks are the equities of reputable, long-running, well-established, and financially strong enterprises that have reported robust operations and reliable earnings throughout time. The majority of blue chip stocks are large cap corporations, which in India would be a company with a market valuation of over Rs 20,000 crore. Typically, a blue chip stock is a market leader in its industry and one of the few largest by market capitalization. These characteristics contribute to the popularity of blue chip companies among investors. Over time, the equities generate substantial dividends. In India, blue chip stocks include Reliance Industries, Tata Consultancy Services, HDFC Bank, Infosys, and others.
❖ Features
● Consistent Return
Historically, blue chip stocks consistently perform well over time. Their prices may not increase rapidly. On the other hand, the stock appreciates over time, providing investors with favorable returns. The company’s well-established business and revenue stream mean that money put in these stocks remains intact.
● Risk
In the short term, blue chip stocks are often low-risk and low-return investments. Therefore, if you have a financial plan and want to increase your wealth over a specific length of time, say five years, you can consider blue chip stocks as a portion of your investment. Your portfolio should contain a mix of equities to achieve the desired financial outcome, but investing in blue-chip stocks helps construct a stable portfolio because they are generally low-risk. But only invest as much as you can afford and as per financial objective, investment horizon, and risk appetite.
● Resilient
Typically, the debt to equity ratio levels of these companies are low or nonexistent, and they are capable of enduring a tumultuous market situation. The vast majority of the finest blue chip stocks are industry leaders. Moreover, it is commonly observed that a blue chip company is less influenced by unfavorable financial situations during recessions or short-term market volatility.
● Liquidity
The most popular equities in the market are large cap stocks. Trade volumes are substantial due to their popularity. Hence, it is easier to sell or purchase in the secondary market.
● Diversification
Blue chip stocks are the equities of well-diversified corporations with diverse revenue streams. Thus, the losses sustained by one channel are offset by the gains generated by another. As a result, investors are able to diversify the risks associated with investing in blue chip stocks, as companies have spread their tentacles across several sectors and industries. This serves not just as a buffer against losses sustained by one sector, but also as a source of resilience during operational setbacks.
Before investing, an investor needs to keep in mind a few other critical financial features of blue chip firms, in addition to those outlined previously. The market value of the majority of blue-chip firms in India is larger than Rs. 20,000 Crores. These businesses have a history of continually raising their top line and operating margins on an upward trajectory. However, a low and consistent debt-to-equity ratio may also be seen as a key characteristic. Blue chip firms are renowned for repaying their shareholders with stable and rising dividends. In addition, these businesses should have a high return ratio (both return on equity and return on capital employed), a high-interest coverage ratio, the ability to create cash flows constantly, etc.
2. Mid Cap Stocks
Mid cap stocks are shares of companies with a market capitalization between INR 5,000 crore and INR 20,000 crore. The market capitalization of mid cap stocks is approximately one-fifth that of large-cap stocks. In terms of revenue, client base, size, personnel, etc., mid cap companies are smaller than large-cap stocks. These equities exhibit greater volatility than large cap stocks. These equities are, nonetheless, less risky than small cap stocks.
Mid cap stocks have a strong return potential despite their risk. As a result, mid cap companies are more accessible to investors who are ready to take on greater risk than large-cap stocks. Mid cap stocks don’t have as much information readily available as large cap stocks do. As a result, it is challenging at times to analyze mid cap stocks vis a vis large cap stocks. The fact that mid-cap companies’ sales and profits are expected to increase is one of the benefits of doing so. Productivity, value, and market share of a company are all expected to increase along with profits. These equities’ market positions are seen as unpredictable because they represent newly growing businesses. They do, however, stand a high potential of developing into large cap companies in the future.
❖ Features
● Risk
Mid cap equities are less volatile than small cap stocks. Mid cap equities, on the other hand, are more volatile than large cap ones. As a result, when favorable market conditions or positive trends, the returns are bigger than those of large cap stocks. During a slump, however, returns will be much lower in contrast to large-size companies.
● Future Prospects
One of the most appealing aspects of mid-cap stocks is their high potential for increased profitability, productivity, and market share. During a bull market or favorable market conditions, mid-cap companies might gain substantially, resulting in exponentially higher returns.
● Liquidity
Mid-cap equities are more liquid in comparison to small-cap companies. Buying and selling stocks is simple because they are relatively well-known and popular. As a result, mid-cap stocks provide excellent liquidity to investors.
● Diversity
Midcap stocks come in a variety of sizes, sitting between large cap and small cap firms. These shares come with a variety of risks and rewards. Some mid-cap companies might be in the development phase and so offer stability over returns, whilst others might have recently left the small-cap category, which may prioritize returns over stability.
3. Small Cap Stocks
Indian listed companies with a market capitalization of less than INR 5,000 crore are considered small-cap stocks. The majority of these businesses lack a strong reputation and a long history. Small-cap companies are those that are still in the early phases of development.
Although these companies are tiny, they have a lot of room for growth. They are risky investments because of their relative youth, lack of experience, and slim chances of long-term success. Small-cap stocks are consequently more volatile.
Due to the high volatility of small cap stocks, share prices frequently change in response to short-term market corrections. However, Small cap stocks have the potential to produce large gains during a bull market phase, and during a market slump, the likelihood of negative returns is also very high.
❖ Features
● Risk And Return
Small cap stocks are among the most lucrative investment opportunities accessible. Thus, small-cap companies have a significant potential for producing returns of greater than 100 percent. Small-cap stocks offer a high potential for wealth creation. Consequently, they are an attractive investment alternative. Choosing the right stocks and holding them for an extended period can yield substantial returns and capital appreciation. They are often referred to as “multi-baggers” since they can provide much larger returns than large and mid cap equities. Nevertheless, one must take note that small-cap equities are extremely sensitive to market fluctuations. Consequently, the investments are extremely volatile. This is the greatest risk involved with investing in small cap stocks. Therefore, Before investing in small cap stocks, one must perform extensive research, make prudent asset allocation decisions, and have a long-term investment strategy.
● Growth Prospects
Small cap stocks are emerging companies that are relatively new and in the early phases of development. Thus, their potential for growth and expansion is high. The companies have the potential to become the succeeding mid cap and then large cap companies.
● Market Volatility
Small cap stocks are notoriously volatile, and their prices respond rapidly to market fluctuations. These equities, for instance, perform better when the market is bullish and worse when the market is bearish. Due to their reliance on the market, small cap enterprises are susceptible to market fluctuations. Therefore, these equities have a strong propensity to lose value during market downturns and require more time to recover. Consequently, they are a dangerous investment alternative. In addition, small-cap firms have fewer revenue streams than large cap firms. Large cap corporations have a more broad business portfolio and the ability to develop into new markets. Similarly, mid cap stocks are more established than small cap stocks, with a greater cash flow, capital, and variety of products and services.
● Liquidity
Small cap equities have lower liquidity than large cap and mid cap stocks. Since they are less well-known, they have less liquidity. As a result, buying and selling in the secondary markets becomes a little complicated.
● Long-Term Investment
Small cap stocks are only appropriate for long term investments due to their extreme volatility. The pricing of small cap shares is significantly impacted by market fluctuations. A long term investment horizon is therefore required to balance out the volatility and produce sizable profits.
What Is a Long Term Investment Strategy?
A long term investment strategy involves owning securities such as stocks, shares, bonds, and mutual funds for longer than one year. Although a year may seem like a lengthy period, it cannot be considered a long term investment. These investments have a duration of three, five, ten, or more years. Although this term indicates that your funds will be frozen for this length of time, it is well worth examining the benefits it offers. Again, why is a long-term strategy necessary? Is it a marketing strategy to lock in your funds for an extended period of time? Why should I make long term stock investments? These are some questions that many investors, especially novices, continue to have.
Investing in the stock market entails managing market risk and volatility. Before investing in the stock market, you should be aware that share and stock prices fluctuate and are unpredictable.
When prices vary, the majority of new investors feel their money is misplaced and begin to abandon the market. However, this is not the proper approach to gaining money on the stock market. If you pay close attention, you will notice a significant difference between the stock market today and five years ago. You will see that long term investments have never experienced a decline. Therefore, if you want to profit from the stock market, you must remain involved over the long term and observe how your money grows magnificently.
Advantages of Holding Stocks In Long Term
- Investment Period
The time frame may appear more like a word than a benefit, but it is, in fact, an advantage. In the case of long term equities, the longer you hold them, the greater the gains you can realize. In stock markets, time is money. Whether you’re seeking to reach a financial or a personal objective, your success will depend on the length of time you’ve invested in the market. If you remain invested for the long term, you can also reap the benefits of compounding. Typically, these organizations have sound financials, clear visibility of long-term earnings, robust company growth, and substantial capital on the balance sheet to secure the business’s long-term viability.
- Compounding Impact
Those who have recently entered the stock market may be unfamiliar with the power of compounding. It is among the greatest advantages of investing in long term equities. This is the entire concept underlying long term investments. And if you want your profits to rise exponentially, you should begin investing early. You will be surprised by the results after a couple of years.
- Diversification
Diversification is crucial for maximizing gains in the stock market. This is another reason why you can invest in India’s top-performing long term stocks. Diversification of a portfolio is a relatively straightforward concept to comprehend. Consider that you have six eggs in a single basket. What happens if you lose your basket? You’ll lose every egg, correct? This is why you should not place all of your eggs in one basket. Likewise, the same idea applies to investments. With long-term investments, you have sufficient time to construct and organize a diversified portfolio.
- Emotions Are Out Of The Equation
Frequently, our emotions obscure our judgment, leading to errors. However, long-term investing removes emotion from the equation and facilitates a more rational decision-making process. Long-term commitment aids in avoiding a knee-jerk reaction and abandoning the market in response to short-term turbulence.
- Correction Can Be Made Easily By Infrequent Churning
With a long term perspective, you can quickly fix your investment errors and make the required portfolio adjustments. In other words, you have the much-desired flexibility and room to make course corrections if your strategy deviates from its intended course. This is a difficult task from a short-term perspective.
Disadvantages of Holding Stocks for the Long Term
- Risk Of Losing Principal Investment
If the company in whose stock you are investing does not perform as anticipated, there is a risk of losing the initial investment. Note that when a company’s performance falls short of expectations, its share price declines, and a consistent decline leads to wealth erosion.
- Early Withdrawals
This is another downside of investing in the long run. In the event of an emergency that necessitates a withdrawal, the accumulated compounded gains are quickly erased. Additionally, you may feel as if you have little influence over the invested funds when making long term investments.
- Extensive Research
Although all investing takes diligence, long-term investing is typically far more rigorous. After all, it takes time to find a company or concept in which you have confidence for decades.
Who Should Invest In Long Term Investment Stocks?
- Risk-Averse Investors
Risk-averse investors can also benefit from long-term investing, similar to investors who may not have the time to stay up-to-date and well-educated about the market. On the stock market, it is equally crucial to regulate one’s emotions as it is to invest in quality stocks. The daily fluctuations of the market may cause a person with an aversion to risk anxiety and stress, leading them to make unwise choices.
Long term SIP investments in large cap mutual funds are ideal for these investors. Investing in a large-cap mutual fund will provide them with the consistency, discipline, diversification, and potential to outperform the market over the long run.
- Salaried Individuals
Monthly salaries are paid to salaried employees at the end of each month. Since salaried employees are aware of the amount of money they receive each month, it is simpler for them to plan their investing journey and dedicate a monthly amount to the long term stock.
As We discussed over the long term investment strategies and their benefits and upside, here is the list of best shares to buy for long term.
Following are the best stocks for long term in India in 2o22 based on their market capitalization,
| Stock Name | Code | Current
Price (₹) |
Market Cap (Crore) | P/E | ROE % |
| Reliance Industries Ltd | NSE:RELIANCE | 2,545 | 17,58,555 | 26.30 | 8.28 |
| TCS | NSE:TCS | 3,365 | 11,86,612 | 30.84 | 49.48 |
| Infosys | NSE:INFOSYS | 1,622 | 6,44,368 | 29.00 | 30.6 |
| Hindustan Unilever | NSE:HINDUNILVR | 2,648 | 6,06,289 | 66.16 | 18.08 |
| HDFC | NSE:HDFC | 1,430 | 8,31,294 | 20.98 | 16.65 |
(*Data as on August 13, 2022)
FAQs
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How long to hold stock to avoid tax?
Investors may hold the stock for more than 12 months, as 10% long term capital gain tax is levied on equity sold beyond 12 months and 15% short-term capital gains tax is levied if sold before 12 months. However, you may consider tax harvesting which is considered one of the most efficient methods for reducing the tax burden when investing in stocks. Under this strategy, investors may realize long term capital gains up to the exempted amount of Rs. 1 Lakh by selling some stocks or a portion of mutual fund holdings and immediately reinvesting the proceeds to take advantage of compounding. Secondly, you can also book your losses from one stock at the end of a financial year to balance it with profit-making ones.
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How long do you have to hold a stock to be considered long term?
Long term investment stocks are basically determined by your investment objective and risk appetite. It may vary from 5 years to 10 years or more.
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What happens when you hold a stock for a long time?
Keeping your assets in your portfolio for a longer period of time is more cost-effective than frequent trading because the longer you hold your investments, the fewer fees you incur. In addition to it, the power of compounding aids you in exponentially building your wealth in the long term.
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Long term investment stocks – is it good to hold?
Historically, the stock market tends to move upward in the long term. Hence, it would be prudent to hold a diversified portfolio for the long term to balance your wealth creation with risk.
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