Investing in equity shares can be a very effective way to grow your wealth over time. There are various ways to do this, like option trading in the share market or focusing on long-term investments in equity shares. Let us explore the top advantages of investing in equity shares for long-term growth and why it might be a better strategy for you.
Benefits of Investing in Equity Shares for Long-Term Growth
1. Potential for High Returns
Investing in equity shares offers the potential for high returns. Although fixed deposits offer a set interest rate and frequency, and debt instruments may come with lower risks, equity shares have clearly outperformed other asset classes over the long term. Staying invested in quality companies can result in significant capital appreciation.
2. Dividend Income
Another benefit of equity shares is that they often provide dividends that can act as an additional income stream. Companies distribute a portion of their profits to shareholders as dividends, which can be reinvested or used as a steady source of passive income. Many companies also offer bonus shares that can result in potentially higher returns in the long run.
3. Ownership and Voting Rights
When you buy equity shares, you become a part-owner of the company. As a result, you get free trading account rights proportionate to the quantity (percentage) of shares you hold. This includes the opportunity to vote on important company matters like electing board members, setting policies, etc. While this may not directly impact your financial returns, it provides a sense of involvement and influence in the company’s decisions.
4. Hedge Against Inflation
Over time, inflation can erode the purchasing power of money. However, investing in equity shares can act as a hedge against inflation. Companies that grow their revenues and profits tend to increase in value, often at a percentage that is higher than the inflation rate. This makes equity shares a more attractive option for long-term wealth preservation compared to other instruments like share market option trading, which might not provide the same level of protection against inflation.
5. Compounding Returns
The power of compounding is one of the key benefits of long-term investing in equity shares. By reinvesting your returns, you can earn interest on your interest, leading to exponential growth over time. This is particularly effective in a long-term investment strategy, where the effects of compounding can significantly increase your wealth. Equity mutual funds are a great example that showcase the power of compounding over longer investment durations.
6. Diversification Opportunities
Investing in equity shares offers ample opportunities for diversification. You can spread your investments across different sectors, industries, and even countries, reducing the overall risk of your portfolio. While share market option trading can also provide diversification, it often requires a deeper understanding of the market and may not be suitable for all investors. Equity shares, on the other hand, offer a straightforward way to diversify and reduce risk.
7. Tax Benefits
Long-term capital gain bonds from equity shares are taxed at a lower rate compared to short-term gains. As per the latest budget, this rate is set at 12.5%. Moreover, long term gains up to ₹ 1.25 Lakhs are exempted from this tax and only the gains exceeding the limit are taxed. This can significantly enhance your overall returns, especially when you hold your investments for the long term.
Conclusion
Investing in equity shares for long-term growth offers numerous benefits, from potential high returns and dividend income to tax advantages and the power of compounding.