While it can be tempting to focus on quick gains and short-term investments, many investors understand the value of taking a longer-term approach. Investing in mutual funds for the long term allows for stability and steady growth over time. It also helps to mitigate risk, as there will be fluctuations in the market, but a diverse portfolio has the potential to overcome them over time. Additionally, choosing a long-term investment strategy in mutual funds often means more time for compounding interest to work in your favour. This approach can result in better returns on investment over time.
Read on to know which types of mutual funds can be a good option for long-term investors.
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Equity funds
An equity fund is a mutual fund that invests primarily in stocks. Equity funds can be further divided into categories based on their market capitalisation, such as large-cap, mid-cap or small-cap stocks. These funds tend to be more volatile than other types of mutual funds, which means they can lose value more quickly during market downturns. However, over the long term, equity mutual funds have the potential to offer a high return on your investment, as the market has the chance to stabilise itself.
There are different types of equity funds, each with a different level of risk, including ELSS (Equity Linked Savings Scheme), index funds, and sectoral funds, among others. Most financial experts recommend that investors need to have a well-diversified portfolio that includes high-quality equity funds along with other asset classes like bonds and alternative investments.
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Fixed maturity plan (FMP)
Fixed maturity plans are a fixed tenure mutual fund scheme that offer investors the opportunity to invest in a portfolio of debt instruments with a predetermined maturity date.
For example, an FMP with a 3-year tenure may invest in securities with a maturity of 3 years or less. These securities can include commercial papers, certificates of deposit, corporate bonds, treasury bills, state development loans, and government securities, among others.
FMPs can be a helpful tool for investors who need to lock in their investments for a particular period to accomplish their different short-term or long-term goals. They offer some predictability as the fund managers strive to generate returns in line with the maturity profile of the invested FMP. Investors in an FMP are attracted by the fact that returns are relatively less volatile as compared to equity funds.
Why to invest in mutual funds for the long-term?
When it comes to mutual fund, the old saying “patience is a virtue” certainly works. In general, those who take a more long-term approach to investing tend to see greater returns. While there will always be ups and downs in the market, the market has tended to trend upwards over time. Thus, investors who stay invested for the long term are likely to see their investment grow.
Additionally, with long term mutual fund investments, you can take advantage of the power of compounding where you earn more on the interest that keeps getting added to your principal investment amount.
Closing thoughts
Mutual funds are ideal for investing for the long term. But before you invest in mutual fund schemes for the long term, consider the investment objectives of the fund and whether these align with your desired goals and risk tolerance. Also, check the fees, past performance, fund manager profile, liquidity, and entry and exit load to make the most out of your investments.