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The Ultimate Hack: Slash Investment Costs for Lifelong Wealth

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The Ultimate Hack:Slash Investment Costs for Lifelong Wealth


Are you a budding investor or a seasoned one looking to reduce investment costs while growing your capital? If yes, you have come to the best place to find your answers. This article will discuss the benefits of long-term investment you can adopt to minimize your investment costs.

These long-term investment strategies will guide you on riding the market bulls and bear with patience and discipline. So, let’s get started on our journey of financial wisdom

What are Investment Costs?

We all know how far the benefits of long-term Investments go to grow your wealth over time. However, most of us make one common mistake of ignoring the cost of that investment. These costs include fees, commissions, taxes, inflation, etc. If you don’t count these costs, they can feast upon your returns and reduce your net returns before you even realize it.

One way to consider investment costs is to compare them to a leaky bucket. Imagine you have a bucket full of water that represents your investment portfolio. Every time you add more water to the bucket, you contribute to your portfolio. Every time you take out some water from the bucket, you are making a withdrawal from your portfolio. The bucket’s water level reflects your portfolio’s value over time.

Now, imagine that your bucket has some holes in it. These holes represent the various costs associated with investing. When water leaks out of the bucket, you lose some of your portfolio value to these costs. The bigger the holes (or investment costs), the more water (or money) you lose. The more water you lose, the less water (or net returns) you have left in the bucket.

One of the benefits of long-term investing is lower investment costs that yield higher net returns and faster portfolio growth.

Types of Investment Costs

The extra cost you pay to buy various asset classes, such as stocks, bonds, gold, mutual funds, ETFs, etc, is an investment cost. These costs can include:

Taxes: One of the key benefits of long-term investing is lower taxes. Taxes are a share of your earnings or gains that you pay to the government. It can be either Income or Capital gain tax.

Inflation: In the list of benefits of long term investing comes the lower impact of inflation. Stocks have outperformed other asset classes in beating inflation.  Inflation eats up the value of investments by cutting down the purchasing power of money.

Transaction Cost: The activity of frequent buying and selling investments in the market invites transaction costs, such as bid-ask spreads, slippage, market impact, etc. Benefits of long-term investment include low transaction costs when you adopt the time-proven strategy of Buy and Hold.

How Investment Costs Impact Your Returns in Long Term Investing

Investment costs can reduce your net returns and slow down your portfolio growth. Here, we have taken two cases to explain the benefits of long-term investment in saving money from erosion.

 Case 1Case 2
Amount Invested (in Rs.)Rs. 10,000Rs. 10,000
Annual Fees (%)0.5%1%
Tenure (years)Ten yearsTen years
Annual Returns (%)10%10%
Maturity Value (Gross)Rs. 25,937.42Rs. 25,937.42
Maturity Value (Net)Rs.24,782.28Rs. 23,673.64
Cost of FeesRs. 1155.14Rs. 2263.78

Now, let us take another example to understand the effect of investment costs on long-term investments. To understand this, let’s say you retain your investment for 30 years instead of 10 years in the above example.

 Case 1Case 2
Amount Invested (in Rs.)Rs. 10,000Rs. 10000
Annual Fees (%)0.5%0.5%
Tenure (years)Ten years30 years
Annual Returns (%)10%10%
Maturity Value (Gross)Rs. 25,937.42Rs. 1,74,494.02
Maturity Value (Net)Rs.24,782.28Rs. 1,52,203.13
Cost of FeesRs. 1155.14Rs. 22,290.89

As you can see, keeping your investment costs low is crucial for long-term investments. By minimising your investment costs, you can derive the maximum benefits of long-term investments and compound your wealth faster.

Understanding the benefits of long-term investment: How tenure impacts your investment costs and returns

To illustrate how you can use the benefit of long-term investments to reduce your investment cost, let us consider a real-life example. Suppose you have ₹1 lakh to invest; you have two options: One to go for short-term investment and the other to make opt for long-term.

Short-term investments, held for 36 months or fewer are taxed as ordinary income, which means they are subject to your marginal tax rate. Long-term investments, held for more than 36 months are taxed at a lower rate, depending on your income bracket.

Type of TaxCasesApplicable Tax Rate
Long-term Capital Gain (LTCG)Equity or Equity Oriented Schemes10% (if gains are above Rs. 1 lac)
Short-term Capital Gain (STCG)Securities Transaction Tax (STT) is not applicableApplicable tax slab
STT is applicable15%

For example, suppose you buy a stock for ₹10,000 and sell it for ₹15,000 after six months in one case and after three years in another. Let us analyze the benefits of long-term investments considering your marginal tax rate is 30%. 

 Short Term InvestmentLong term investment
Cost of investment (in Rs. )Rs. 10000Rs. 10000
TenureSix monthsThree years
Sell Price (in Rs. )Rs. 15000Rs. 15000
Capital Gain Tax (in %)30%Nil (Below Rs. 1 lac)
Capital Gain Tax (in Rs.)Rs. 1500Nil
Net Return (in Rs. )Rs. 3500Rs. 5000

As you can see from this example, taxes can make a big difference in your returns. By holding your investments for longer than a year, you can reduce your tax liability and increase your net returns.

Benefits of Long Term Investments

Higher returns: Long-term investments, such as stocks, real estate, and cash, can lead to meaningful wealth creation in the long term. Historically, stocks have outperformed almost all asset classes over the long term.

Lower costs: Long-term investors can save money on fees, commissions, taxes, and other expenses associated with investing. By choosing low-cost investments, diversifying your portfolio, rebalancing your portfolio, and avoiding unnecessary trading, you can minimize your investment costs and maximize your net returns.

Power of compounding: Long-term investing allows you to take advantage of the power of compounding, which is the process of earning interest on your interest. The longer you stay invested, the more your money grows exponentially.

Less stress: One of the pronounced benefits of long term investing is lesser stress. You can reduce your stress and anxiety by making you focus on the things that matter, such as the fundamentals of the company, the growth prospects, the management competency, etc. You don’t have to worry about the hiccups in the markets in the market or react to every news or rumor.

5 Ways To Reduce Your Investment Costs With Long Term Investments

  • Buy low-cost investments: You can enhance the benefits of long term investments by embracing reliable, low-cost investments. Choose investment vehicles that match your risk tolerance and investment goals.
  • Diversify your portfolio: Diversification is a strategy that involves investing in different types of assets, sectors, markets, and themes. This helps to reduce your risk and volatility. With diversification, you can slim down your tax fat too.
  • Rebalance your portfolio: Rebalancing is an investment strategy of adjusting your portfolio allocation periodically. This helps maintain your desired risk and investment objectives. To rebalance your portfolio, you must shuffle the asset classes to bring your portfolio back to desired risk tolerance.
  • Aggregate Transactions: Too frequent transactions directly impact your net returns. On every buy or sell transaction, you may have to pay a commission or a spread to the broker or the market maker.
  • Tax Optimization: By adopting a buy-and-hold strategy, you can minimize your capital gain tax. One proven benefit of long term investing includes low tax liability and higher net income.

Following these tips, you can sustain the benefits of long-term investments and maximize your growth potential.

Key Takeaways

In this article, we have discussed the benefits of long term investments and the importance of keeping investment costs low for meaningful wealth creation. We have seen how investment costs can reduce net returns and slow portfolio growth. We have also seen how you can cut your investment costs by choosing low-cost investments, diversifying your portfolio, rebalancing your portfolio, and aggregating transactions.

We have illustrated the advantages of long term strategies with a real-life example to show how an investment with lower costs and taxes can outperform its alternative with higher costs and taxes.

Using the benefits of long term investments to your advantage, you can save money and grow your wealth faster. You can also achieve your financial goals and enjoy the benefits of compound interest.


How can I find out how much I am paying in investment costs?

You can find out how much you are paying in investment costs by looking at your fund prospectus, fund fact sheet, account statement, and other information related to your investments. With the benefits of long term investments, you can significantly reduce the investment cost.

What are some best practices to follow to keep my investment costs low?

Count on the benefits of long-term investments to keep your investment costs low by:
● Choosing low-cost investments like passive mutual funds or Index funds
● Diversify your portfolio across different markets and sectors to reduce risk, tax obligations, and volatility.
● Adjust your portfolio allocation periodically to maintain your desired risk and return profile.
● Transacting too frequently can incur high costs and taxes and reduce your returns. Adopt a buy-and-hold strategy for long-term investing.

Read more:  How Long-term investing helps create life-changing wealth – TOI

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I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.

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