How to choose stocks for long term investment in India

Blog | Investing

In the world of financial markets, it is the vision of an investment which determines the success of that investment. Longer you are invested in an asset class chances are high that you will be rewarded with high returns. These returns can be considerable when compared to returns given by broad market indices. To achieve this, many investors look for multi-bagger stocks. Generally, high returns do not come in a year or two. You have to hold investments in a stock for a long period of time. Besides this, there are a few crucial things you have to bear in mind when you buy a stock for the long-term investment. Here are they:

  1. Understand the Long-term Trends of Economy
  2. Avoid Cyclical Stocks
  3. Sustainable Investing
  4. Be Alert and make a Sound Investment
  5. Quality of Business


  1. Long-term trends

You need to identify long-term trends in the Indian economy before you get into sector selection or stock selection. Understanding long-term trends help investors create wealth for investors in a stable manner. The Indian economy is a consumption economy and there are many sub-trends within that. These include premiumisation (preference for brands over businesses which can be easily replicated), digitization of services, financialization of savings among others. If you get the long term trend right and there is a large addressable market for high profitability, then you should look for stocks which will benefit from that. Given our age of information, it is not difficult to identify the names of such companies.

  1. Avoid cyclicals

Though stock markets do not offer linear growth in returns or movement of a company’s stock, there are businesses which offer linear growth to a certain extent. Companies such as Asian Paints, TCS, and HDFC Bank among others have shown profitable growth for a long time. It is crucial that you choose such businesses that can offer long period of earnings’ growth. Stock markets follow such secular growth stories. Cyclicals do not fit the bill as they fade out in down cycles.

  1. Compliance

Sustainable investing is catching up worldwide. Companies that score high on environmental, social and governance parameters tend to be preferred choices for most institutional investors. Companies in tobacco, liquor, and gambling businesses may not enjoy high valuations. If you are investing for the long term, then buy those businesses which are preferred by the long-term institutional investors such as pension funds.

  1. At the helm

When you are going for a long journey, you cannot afford a sleepy guy in the driving seat. Long-term investing is no different. Invest in a company which is run by sound promoters. If a promoter has duped non-promoter shareholders in the past, then stay away from such companies. Years of gains in your portfolio will disappear in no time if you buy shares of such companies.

  1. Quality of business

Companies that do not require much capital for growth, or can fund their growth with internal cashflow generation are better compounder of money. Such companies generally have lean balance sheets. Companies that are not dependent on one customer or one supplier are better. Companies which offer products at fat margins tend to do better in the long term than companies that are focused on low-margin and high-volume products.

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