Investing for a long term in mutual funds: The smart investment strategy for your future

Posted On: 07 June 2023

In today's uncertain financial landscape, it is crucial to adopt a smart investment strategy that can help you achieve your long-term financial goals and secure your future. One such strategy worth considering is investing for a long-term in mutual funds. With a diversified portfolios and professional management, mutual funds offer potential growth and stability over an extended period. In addition, a mutual fund for long term can provide an opportunity to diversify investments across a range of assets, thus balancing risks, and rewards.

Here, we will explore the benefits of long-term investing in mutual funds and how it can play a pivotal role in building a strong financial foundation.

Table of contents

What is long term investment in mutual funds?
Long term investment strategy
Benefits of investing for a long term in mutual fund
Factors to consider while choosing long-term mutual fund investments
Risk of investing for a long term in mutual funds
Three key features of mutual funds
4 reasons to invest in mutual funds for the long-term

What is long term investment in mutual funds?

Investing for a long term in mutual funds can help you achieve your financial goals. Mutual funds pool money from multiple investors and are managed by professional fund managers. The key characteristic of staying invested for a long-term is the focus on holding investments for a considerable duration, typically five years or more.

Long term investment strategy

Investing for a long-term in mutual funds requires a strategic approach. Let's have a quick look at how you can strategize your investments:

Define your investment goal clearly - What is it that you're investing for? It could be for retirement, funding your child's education, or buying a home. Having specific objectives helps determine the appropriate investment strategy.
Strength is in variety - Mutual funds provide access to a wide range of asset classes such as stocks, bonds, and commodities. By spreading investments across different sectors and themes, you can diversify your portfolio and minimize the impact of market volatility.
Patience is a virtue - Avoid making impulsive decisions based on short-term market fluctuations. By staying invested over the long haul, you can benefit from the power of compounding.
Rebalance your portfolio - It is a crucial step to align your portfolio with changing market conditions. Additionally, investing through systematic investment plans (SIPs) allows you to invest a fixed amount at regular intervals, averaging out the purchase price over time.

Benefits of investing for a long term in mutual fund

Let us look at why long-term investments in mutual funds can be a smart investment strategy for your financial future:

Have the potential for higher returns compared to traditional savings accounts or short-term investments. By staying invested for an extended period, investors can benefit from compounding returns and the growth potential of the underlying assets.
Offer diversification by investing in a variety of asset classes, such as stocks, bonds, and commodities. This diversification helps reduce the impact of volatility in any single investment and spreads risk across different sectors and regions.
Are managed by experienced professionals who conduct in-depth research and analysis to make investment decisions. Investors benefit from the expertise and knowledge of these fund managers, who actively monitor and adjust the fund's holdings based on market conditions.
Offer liquidity even though they are designed for the long haul. Investors can typically redeem their units or sell their holdings when needed, providing them with the flexibility to access their funds in case of emergencies or changing financial needs.
Encourage a disciplined approach to investing. By committing to a long-term investment horizon, investors are less likely to be influenced by short-term market fluctuations and make impulsive investment decisions. You also have the flexibility to contribute regularly through systematic investment plans (SIPs).

Factors to consider while choosing long-term mutual fund investments

For investors committed to building a strong financial future with the help of various investment strategies, it is imperative that you look at all the aspects of investing in long-term mutual funds:

Determine your investment objective. Whether it's long-term capital appreciation, income generation, or a combination of both.
Evaluate your risk tolerance level. Some funds may carry higher risks but offer the potential for higher returns, while others may focus on mitigating loss of capital.
Review the fund's holdings and diversification strategy. A well-diversified fund across different sectors and asset classes can help manage risk effectively.
Review the fund's terms, including any exit loads, redemption restrictions, or minimum investment requirements. Understand these terms to avoid any surprises or penalties.

The above includes some of the very important factors to consider while making a choice to stay invested for long term in mutual funds. Remember to consult with a financial advisor if needed to ensure your investment choices are in line with your overall financial plan.

Risk of investing for a long term in mutual funds

As there are two sides to every coin, even mutual funds for long term come with their own set of cons. Let's assess the risks associated with long-term mutual funds:

Market volatility - Mutual funds are subject to market risks and fluctuations.
Inflation risk - Inflation erodes the purchasing power of money over time. Thus, it is prudent to consider the potential impact of inflation on the real value of your investments.
Interest rate risk - Interest rate risk is the potential for investment losses that can be triggered by a move upward in the prevailing rates for new debt instruments.
Credit risk - Mutual funds that invest in bonds or other fixed-income securities are exposed to credit risk. If the issuer of a bond defaults on payments, it can negatively impact the value of the fund.
Regulatory and legislative risks - Changes in regulations or legislation governing the financial markets can impact the operations and performance of long-term mutual funds.
Concentration risk - Funds that are heavily concentrated in a particular sector or theme may be exposed to higher risks if adverse events impact that sector or theme.

Understanding and acknowledging these risks associated with long-term mutual fund investments can help investors make informed decisions and set realistic expectations.

Three key features of mutual funds

Professional management: Mutual funds are professionally managed and pool money from different investors to invest in a range of assets. The fund managers, equipped with vast experience and a team of analysts, do all the work so that you can get a relatively reasonable return over long term from your mutual fund investment.

Portfolio diversification: If you compare buying stocks of individual companies for investing in mutual funds, you will realise that mutual funds carry a relatively lower risk, thanks to the in-built diversification. The risk is spread among different asset classes in a mutual fund investment, making it far more suitable for most investors.

Ease of use: You can invest in mutual funds offline as well as online easily. Most mutual funds allow you to start investing with amounts as low as Rs. 500. Many schemes also offer Systematic Investment Plans (SIPs) where you need not invest a lumpsum. Instead, a small amount is invested regularly into the mutual fund. You can set the instalment amount and frequency based on your needs.

You can invest in mutual funds in the short or long-term depending on your investment strategy. In fact, mutual funds allow you to invest for as little as one day – for example, in overnight funds.

However, the potential for generating wealth over time lies in long-term investment.

4 reasons to invest in mutual funds for the long-term

Here are 4 reasons you should make a long-term mutual fund investment:

Return potential: One of the reasons why mutual fund investments have been popular is that they offer relatively better return potential than many other investment options out there over the long term. Mutual funds can be more tax efficient than individual stock investments, offer relatively better return potential than traditional banking products (at a higher risk), and are easier to liquidate than fixed assets.

Overcome volatility: Pick up data from any time period in the past and you will see several instances of market volatility. The volatility phases may last for a short duration of time but can test an investor’s discipline. If the investor panics during these times and redeem their investments, they are not only likely to lose money because of the market conditions but also miss out on the opportunity to create wealth. A long-term mutual fund investment balances out bursts of market volatility to deliver a relatively better return potential.

Tap into the power of compounding: If you take two people who start retirement planning by investing in mutual funds at ages 35 and 45 respectively, the person who started earlier will have a much larger retirement corpus than the one who started 10 years later, provided their principal amount is the same. This can be attributed to the power of compounding. Similarly, the longer you stay invested in mutual funds, the better will be your chances to see reasonable returns. In short, if your goal is to create wealth with a mutual fund investment then you must consider an investment horizon of at least 7 to 10 years.

Beat inflation: As an investor, you already know how the value of money changes with time. If you invest in mutual funds in the short term, the returns you earn from it may not be able to beat inflation. However, a long-term mutual fund investment can deliver potentially inflation-beating returns.

Tax efficiency: Capital gains earned from mutual funds are taxed under the Short-term Capital Gains (STCG) Tax and Long-term Capital Gains (LTCG) Tax categories based on how long you held the investment. If you invest in equity mutual funds in the long term, capital gains up to Rs. 1 lakh in a financial year are exempt from tax and taxed at 10% thereafter (plus applicable cess and surcharges). Compare this with STCG where a flat rate of 15% is applicable to capital gains (Plus applicable cess and surcharges).

conclusion

In conclusion, long-term investment in mutual funds offer the potential for higher returns and diversification, but they come with certain risks. However, by carefully evaluating investment objectives, considering risk tolerance, and conducting thorough research, investors can make informed decisions. Long-term investment in mutual funds can serve as a valuable tool to achieve financial goals over an extended period. Consultation with a financial advisor can provide additional guidance tailored to individual circumstances. With a thoughtful approach, mutual funds can be a strategic part of securing a stable financial future.

FAQs:

Are mutual funds a good long-term investment?

Yes, mutual funds for long time can prove to be a good investment option. Mutual funds offer diversification, professional management, and have the potential to generate good returns over a long period of time.

Can I invest for 10 years in mutual funds?

Yes, you can invest in mutual funds for a 10-year time frame. In fact, mutual funds can be a good long-term investment vehicle that can help you reach your long-term financial goals such as buying a property, paying for your child’s higher education, planning for your retirement, etc.

What makes mutual funds a powerful long-term investment?

Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets. Over the long term, this diversification can potentially lead to reasonable returns and reduced risk compared to individual investments.

How do I choose the right mutual fund for long-term goals?

Consider your financial goals, risk tolerance, and time horizon. Different mutual funds have varying risk profiles and objectives, so it's crucial to align your choices with your specific needs.

What's the recommended time frame for long-term investing in mutual funds?

Generally, long-term investing in mutual funds implies a horizon of at least 5 to 10 years or more. This allows your investments to potentially weather market fluctuations and benefit from compounding.

Can I make changes to my mutual fund portfolio over the long term?

Yes, you can adjust your mutual fund holdings to align with changing financial goals and risk tolerance. However, it's often advisable to review and rebalance your portfolio periodically rather than making frequent changes.

Is long term investment always less risky than short term investment?

No, long term investment is not always less risky than short term investment. Both long term and short term investments involve some level of risk, and there are no guarantees of success. Hence, one must always align one’s objectives and risk appetite with the chosen investment strategy.

How can I manage risk in long

To manage risk in long term investment, it's important to diversify your portfolio, invest in assets that align with your risk tolerance, and work with a financial advisor to develop a long term investment strategy.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.