Long term stocks comprise securities ideal for investment for a prolonged period, serving the dual purpose of both capital protection as well as return generation. Such investment tools cater to individuals having an aptitude for risk, as well as risk-averse investors. Stocks of small, mid and large-cap companies can be considered for long term investment purposes.
While large-cap companies (having market capitalisation value higher than Rs. 20,000 Crore) are preferred by investors looking for high dividend returns and preservation of the corpus, small and mid-cap companies allow individuals to enjoy substantial profits through long term capital gains.
Types of Long Term Investment Stocks
Depending upon risk aptitude and goal of investment, individuals can choose to pool their funds in large-cap or mid and small-cap companies. The returns associated with each such investment vary considerably as per the nature of the underlying company.
- Large-cap companies
Investment in such companies is primarily undertaken to enjoy a steady cash flow in the form of regular dividend pay-outs. Also, stocks of large-cap companies are relatively stable, as market forces do not heavily influence it.
As the risk factor is significantly low for the best long term investment stocks pertaining to large-cap companies, it is often a popular choice among risk-averse investors. Such low-risk rates can be attributed to the sound financial backing and foundation of such companies, allowing them to tackle any adverse effect in the current economy without a significant fall in their profits. As a result, a steady flow of dividend pay-outs is offered to investors annually, half-yearly or quarterly.
- Small and mid-cap companies
Top long term stocks of small and mid-cap companies ensure significant wealth generation for investors, as it benefits from stock market fluctuations. Such businesses have considerable potential for growth, which is demonstrated by efficient management faculty and sound financial statements.
Investing in such companies ensures adequate availability of funds, which can be effectively utilised to generate revenue. This, in turn, leads to higher profits. In the initial years, such gains are retained and reinvested for business development purposes, thereby meeting their expansion requirements.
As a result, such companies often experience robust development, increasing their market reputation and corresponding share prices. Thus, individuals can profit from capital gains upon resale of the securities in the future.
Investors having a substantial aptitude for risk opt for these long term investment stocks, as such companies often run the risk of being adversely affected due to any slump in the stock market, thereby incurring massive losses for investors.
Who should Invest in Long Term Stocks?
As stated above, top long term stocks consist of securities of both large and mid and small-cap businesses. Depending upon your goal of investment, you can choose to invest in securities issued by either multinational companies and industry giants or newly launched business having a significant potential for success.
Individuals with an investment goal of stable monetary flow and protection of corpus can choose to invest in stocks of businesses having a market capitalisation value of at least Rs. 20,000 Crore or more. Such investors have adversity towards high associated risks, and hence, choose companies having a stable foundation, and are not readily affected by market forces.
On the contrary, the investment regime of many individuals is wealth accumulation through capital gains. Hence, the investment portfolio of such investors comprises mainly securities issued by small and mid-cap companies. Returns generated through capital gains is significantly higher in such cases, however, at higher risks. Any minor fluctuation in the stock market can have a drastic impact on such long term investment stocks.
Individuals can look into the market capitalisation value as well as corresponding fluctuations in the respective share prices to access the volatility of the stock. Depending upon the resulting risk factor, you can choose among the various share market instruments.
Advantages of Long Term Stocks
- High returns
The primary benefit of long term stocks is that it generates high returns on total investment. Such returns can be in the form of periodic dividend payments, or through capital gains realised upon resale of securities.
- Relatively lower risks
Long term stocks are associated with lower risks when compared to short term securities. Investment in small and mid-scale companies should be made for an extended period to mitigate the risk factor substantially as investors wait out the fluctuations in the share market due to external reasons. Alternatively, losses in the short term can be endured by large scale companies as well, due to a fall in the production and/or sales rate.
Such risks due to external factors don’t apply in the long run, owing to a difference in the prevailing economic condition, ensuring significantly lower risks in the best long term stocks.
Limitations of Top Long Term Stocks
Long term stocks often have an extended investment tenor of higher than one year, wherein the entire principal is locked in the share market of the country. This leads to reduced availability of liquid funds, which can cause financial distress in emergencies. Untimely withdrawal can also lead to significant losses, and hence, is not a feasible option among investors.
Investing in long term stocks of large scale companies levies the burden of dividend distribution tax, wherein tax at the rate of 10% is deducted from total dividend income, provided it exceeds Rs. 10 Lakh. No tax is applied on such dividend returns if the total value of the same is under Rs. 10 lakh, respectively.
Long term capital gains tax is also levied on total returns generated through the sale of small and mid-cap securities at a rate of 10%. Such tax rates are only levied if the holding period of the stock or mutual fund exceeds one year.
Despite such limitations, long term stocks are one of the most preferred tools for investment among individuals. While beginners stick to shares of large-cap companies to dilute risk factor, experienced investors with in-depth knowledge about the operations of the stock market often choose to invest in the securities of small and mid-scale companies, after thoroughly analysing the respective business.