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In the context of stock markets, what do we mean by long-term?

15 Oct 2014 |By: Sunil Patni

In the context of stock markets what do we mean by long term

Long-term – in the context of Indian stock markets, as a thumb rule is reckoned as 5 years. This would mean that you stay invested in the chosen security for a continuous period of 5 years at the minimum.  However, in many instances, long-term could be significantly longer extending to 20 or more years.

Hasn’t the philosophy of long term investment undergone serious changes?

When we look at the Indian stock markets some 20 years ago, initial public offerings from established or promising businesses were fewer and the offer size was also significantly smaller compared to some of the IPOs that are floated in current times. Most IPOs were issued at par and premiums were hardly the order of the day. People who invested in companies like Reliance, Infosys, HDFC etc. have seen their wealth multiply at a consistent pace. But, the experience is not uniform across the market. Rights and bonus shares issued by these companies added up tidily and that kept the investors happy. Tax structure on capital gains also encouraged investors to choose long term investments in preference to short term investments. In the last decade or so – beginning 2000, the factors that made long term investment attractive have nearly disappeared from the Indian capital market.

Many companies are sitting on huge cash piles – If reserves are not distributed, long term investments will become less attractive.

Given the kind of volatility that we are experiencing in the Indian as well as global stock markets today, holding on to investments for dividend income and perceived capital appreciation could potentially find investors losing money, rather than making money from their investments. Bonuses constituted the major driver for long term investment in stocks. In 2014, several companies are sitting on cash piles as big as 10 times their paid up equity and adding more to their free reserves year after year.  The only consolation is that dividends from these companies are 400% or more.

Read more- 9 things to look in a stock before making investment

Avoiding capital gains tax should not be the criteria for long term investment

Current provisions of Capital Gains tax stipulate that profits from investments held for periods less than 12 months will be subjected to CGT. However a close scrutiny of price trends in the Indian stock markets reveal that stock prices often times experience frequent price swings. In terms of magnitude, these short terms swings tend to be greater than or equal to the magnitude of a 1 year price movement of the stock. If your investment has appreciated by 20% or more in just 3 months, are you not better off booking your profits than waiting for long term gains? What if your stock goes into the negative territory at the end of the 1 year period?

Roller coaster

In recent times, we have seen many stocks rising rapidly and then falling abruptly to dismal levels.  Volatility in the Indian stock market is there to stay. You can be happier with the profits in your pocket than watching it on the screen.

Let us know what  you think of the article by commenting below.

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