If you want to increase your money and keep up with inflation, investments are crucial. As a result of inflation, money gradually loses its purchasing value. Your monthly salary savings may be decreasing in value every day if you haven't invested in a valuable asset.
Even if your income is fixed while you work a full-time job, you won't have enough free time to invest in the stock market. When selecting an investment tool, it is usually preferable if you can invest both time and money. There are a few investment products, nevertheless, that won't require a lot of your effort for research and analysis if you're pressed for time.
There are many financial markets and investment opportunities in Nigeria. Each instrument has its own combination of rewards and risks which is suitable for various sorts of investors. We look at a few investment subcategories that may be beneficial for people who work full-time.
What is an Investment?
Investments are goods or assets that are bought to produce income or appreciate in value. The underlying premise here is that assets appreciate and gain value over time. To maximise returns, buying securities, real estate, and other valuable assets is part of the definition of investing in finance.
A person who buys a product as an investment does so with the goal of making money with it rather than using it for immediate consumption. The wealth accumulated can be used for a number of things, including filling income gaps, saving for retirement, repaying loans, covering educational costs, or purchasing other assets.
You can earn money from investments in one of two ways. The first is that you might make money when you sell an asset that can be sold. Alternatively, you might invest in an income-generating strategy and generate money by building up gains.
There is danger involved in investing constantly. You run the danger of not getting a return on your investment or possibly losing all of your money. Government securities, for instance, have little risk. When buying stocks, beginning a new business, or growing an existing one, there is a substantial risk involved.
Difference between Long Term and Short Term Investment:
Since the term "short-term" refers to a brief period of time, any item retained for a year or less qualifies as a short-term investment. Long-term investments typically have a holding period of five years. Most investors include these investments in portfolios and hold them for a number of years, depending on their investment philosophy.
Short-term stock investments with a time horizon of one to three years are feasible. A short-term investment, however, is considered for tax reasons when the investment duration is less than a year. More than five years is the ideal time horizon for long-term investing. Depending on the investor's desire to hold them, an investment with a 3 to 5 year investment tenure may still qualify as long-term.
Investments with higher levels of risk have the potential to yield higher returns than those with lower levels of risk, which often yield lesser earnings. Long-term investments are riskier since it is difficult to forecast their potential and price volatility. However, because stocks are held for many years or even decades, they have a relatively small impact on the continuous changes in the market.
Whether to invest for the long run or the short term depends on the investor's financial situation and investing objectives. You should consider the benefits and drawbacks of having a mix of short- and long-term investments in your portfolio before deciding on one or both.
Best Long-Term Investment Ideas in Nigeria:
Any of Nigeria's many banks offers customers the opportunity to open a fixed deposit bank account. This account allows you to deposit a specific sum of money for a specified period of time at a fixed interest rate. Before making an investment, one should research and contrast the interest rates provided by the major Nigerian banks. Several banks may offer interest rates that range from 4% to 13.88% depending on the period of the deposit.
A trained fund manager oversees your investment in a mutual fund in accordance with the fund's objective. Mutual funds are pooled investment vehicles. Asset Under Management (AUM), which is formed by combining the investments of several investors, is then invested in the relevant capital markets, such as stocks, bonds, commodities, etc. For Nigerians with full-time jobs, mutual funds are quite helpful because you don't need to analyse the markets or monitor pricing. While it is important to look at the past performance of the mutual funds you should also read the prospectus of each fund to learn more about the assets, conditions, and risks they are investing in.
Typically, investing in stocks entails doing research on the company and keeping a careful eye on price fluctuations. A full-time employee might not be the ideal fit for investing in growth and value businesses. As a result, these investors ought to choose Nigerian Stock Exchange firms that pay dividends because they are less volatile (NGX). Such stocks ought to be picked in light of their projected long-term dividend yield.
Real estate is viewed as a low-risk, high-return investment. The price of real estate in Nigeria has in the past steadily increased over a long period of time. In addition to buying and selling at a higher price, investors can profit by renting or leasing the property.
A real estate investment trust is a more affordable and liquid substitute to real estate (REIT). REITs allow for pooled investment, just like mutual funds do. Unlike mutual funds, REITs only invest in commercial real estate holdings. The money made through the sale of commercial real estate, its rental or leasing, or the interest on the mortgage payments for those properties is then divided equally among the investors.
For many investors with a modest appetite for risk, bonds are the ideal low-risk investing tool. Both the government and businesses issue them to raise money. Each bond has a set maturity period and an agreed-upon interest rate. Each bond carries the possibility of default, which occurs when the issuer is unable to make the guaranteed payment on schedule. The bond's credit ratings affect the default risk.
Goals of Long-Term Investment:
- Creation of Wealth: Holding onto assets or stocks for an extended length of time or until maturity generates amazing returns and increases the investment's worth.
- Minimization of Risk: Holding onto investments for a long time removes the risk associated with adverse market conditions, such as a recession.
- Sustainable Growth: Given that it offers greater and more consistent profits, long-term investing is a fantastic choice for the long-term expansion of money or assets.
- Association with Quality Companies: A long-term investor might acquire a stake in the ownership of well-known companies or large brands by investing in their equity and funds. As a result, the investor has an opportunity to be involved in the expansion and success of that business.
- Reduction of Taxes and Fees: A tax exemption plan is included with a lot of long-term investments. The processing expenses for an investment naturally decrease if it is made infrequently.
Benefits of Long-Term Investment
1. Risk-Free Investment or Neutral Investment
If you plan your investments for the long run, short-term market volatility won't stress you out more. Your investment will gradually become less affected by market volatility, and when your long-term strategy matures, it will be profitable. Making short-term investments, however, causes ongoing tension due to the ups and downs of the market.
2. Compounding rate of interest
The interest rate that compounds over time is always in your favour. For investors who hope to make sizable profits in the future, good long-term investments are a boon. Additionally, you can reinvest your dividend to profit from compounding on your main sum.
3. Easy to use
It's simple to invest in long-term plans. Once you've invested, you can unwind. You do not need to monitor the daily changes in the market.
4. Decreases your tax liability
You'll pay lower taxes if you invest in the long run, which is another perk. Compared to long-term investors, short-term investors pay a higher tax rate and own their investments for a shorter period of time—1 year or less.
5. Plan for future expenses
All future expenses, including those for education, retirement, cars, etc., can be covered by long-term investment. Long-term investing is a methodical way to discipline your savings so you can achieve your goals.
6. Saves other costs
Regular investments come with various charges, some of which can be extremely substantial. For instance, commissions are required for frequent transactions. For every transaction in short-term investments, you must pay a commission. Additionally, the tax rate is significant. By making a long-term investment, you can spare yourself from having to pay for all of these expenses.
7. Saves your time
You do not need to consistently research and evaluate market trends and patterns when making long-term investments. Instead, you should conduct a single market analysis while making an investment. This helps you save time.
8. Prevents you from taking unnecessary stress
By investing for long-term prosperity, you can avoid and be protected from taking unneeded stress and anxiety. Any shift in the market graph won't disturb your peace of mind because it typically disturbs short-term investors.
Frequently Asked Questions:
Where do rich people invest their money?
Which people invest their money in multiple assets to maintain the principle of diversification. In such cases, even if an asset feels to profit then, there is always another asset in the bag which turns out to be profitable.
Is income from long-term investment taxable?
Yes, income from long term assets are taxable in Nigeria at the rate of 10%.