The Benefits of Long-term Investment Strategies for HNIs

28 Nov 2024 , 10:22 AM

Adopting effective long-term investment strategies can lead to significant wealth creation and achieving financial goals for high-net-worth individuals (HNIs). With proper planning and discipline, HNIs can leverage the power of compounding, minimise their tax outgo, and withstand short-term market volatility through long-term investing. This blog post explores the key benefits of long-term investment strategy for HNIs.

Top Benefits of Long-Term Investments for HNIs

This section explores the top benefits of long-term investing strategy for HNIs. Highlightable benefits include the following:

The Power of Compounding

One of the biggest advantages of long-term investing is the possibility to benefit from compound returns. When earnings on investment are reinvested, the invested money starts earning returns on the previous returns, creating a snowball effect over long periods.

Some people consider compound interest the eighth wonder of the world. Even small sums invested early with compounding can grow to a substantial corpus over 20-30 years. HNIs are especially well-positioned to harness the impact of the compounding effect due to their ability to make significant initial investments, which can multiply manifold over time.

Minimising Taxes

Long-term capital gains from most investment assets, such as equity, debt, and real estate, usually attract lower tax rates than short-term capital gains. By remaining invested for over a year in equity and 3-5 years in other assets, HNIs can qualify for concessional long-term capital gains tax rates and reduce their overall tax outgo.

This allows their investments to grow faster. HNIs can use tools like Systematic Transfer Plans (STP) to stagger their short-term gains over multiple years and avoid attracting higher tax bracket rates.

Withstanding Volatility

Financial markets experience periodic booms and busts. However, the long-term growth trajectory of assets like equity is strongly positive. HNIs can avoid panicking and exiting their investments during market downturns by adopting a long-term view.

Instead, they can use the opportunity to increase allocation to equities at lower valuations. Historically, equity investments held for over 5-7 years have always delivered positive inflation-adjusted returns irrespective of the entry timing. Long-term investing provides the benefit of seeing through short-term volatility.

Achieving Life’s Goals

HNIs have varied financial aims that unfold over long periods, such as retirement planning, children’s schooling, wealth transfer, and more. By matching investments to life objectives and investment timelines, HNIs can use customised asset allotment plans particular to each financial aim.

For instance, retirement money can be invested in equity for long-haul growth, while child education funds can move to debt tools as the goal nears. This organized tactic can assist HNIs in efficiently strategising and accomplishing their life goals.

Building a Runway for Entrepreneurship

Many high-net-worth persons (HNIs) want to launch entrepreneurial endeavors eventually. However, entrepreneurship frequently entails high risks and necessitates financial stability. Long-haul investing can assist these people in forming a financial runway, enabling HNIs to take the entrepreneurial leap more assuredly.

By steadily gathering a pool of investments over time, HNIs can expect to construct an asset base capable of creating passive cash flows to finance new enterprises during the initial stage when incomes may be erratic. Additionally, they can organise their long-standing portfolio approach to give the requisite liquidity to channel seed capital into startups. They can also utilise this sum as security for borrowing debt financing.

The runway afforded by long-standing investing permits HNIs to fully dedicate their time and vigor to their entrepreneurial passions without worrying about finances.

Conclusion

Long-term investing powered by compounding, lower taxes, managing volatility, and goal-based planning offers tangible and sizeable benefits for HNIs. It requires a patient mindset and disciplined approach even during challenging market phases.

However, the rewards for HNIs who can implement effective long-term investment strategies are plentiful. These strategies help create, preserve, and efficiently transfer wealth across generations. Reaching out to a qualified financial advisor can help HNIs craft customised long-term investment plans aligned with their risk appetite and financial objectives.