Here Are All the Reasons That Make Long Term Mutual Fund Investments So Amazing
Tasty food that is unhealthy is going to tickle your taste buds as you put it inside your mouth, but it makes you face serious repercussions in the long run. On the other hand, food which is healthy but not much delicious is no doubt going to offer you that uncanny pleasure of eating but when it comes to living a long healthy life, it will certainly help you. The same is the case with long term equity funds. They may be subject to market volatility in the short term, but in the longer run, they help you build wealth.
Time is an important factor to consider while selecting an investment option. When you invest your money for a long term, your money sees a lot of market ups and downs, but when it comes to finally receiving the return; neither the highs nor the lows are going to have a serious impact on the fund, because everything is going to get evened out. This is called the law of average. Besides, when you save for a long term, your funds can be maneuvered in such a way that they yield desirable results. Over a short term, this scope gets limited!
Let’s take the example of an ELSS (equity linked savings scheme) here. Since there is a lock-in period of three years for this fund, the fund managers get an opportunity to make strategic investments in order to make them more profitable, without having to give it back to investors on demand.
Although there are many benefits of investing in a mutual fund scheme over a long term (more than five years), the following are the most important ones. So, check them out -
You can benefit from the SIP approach of investment -
The reason why short term mutual fund schemes are risky is that most of the times, they go through a sudden upsurge, which is followed by a significant and mostly equal dip in performance. This is not the case with a long term scheme. Besides, with long term investments, you can put SIP to your advantage. How? Well, when an individual makes an investment in a long term mutual fund scheme with the help of the SIP approach, the total amount to be invested is paid at regular intervals. So, when the market witnesses a low, you can buy less number of the fund’s units at the same price. On the other hand, when the market performs well, you can purchase more number of units for the same price. Over a long term, the risks in the market get averaged out by virtue of rupee-cost averaging.
You get to diversify your investment -
Most long term schemes available in the market today focus on portfolio diversification. Diversification is extremely essential if you don’t want market volatility to eat up all your money. With the right allocation of funds, you will be able to create a good amount of wealth over the long term. So, people who make investments for a long term are able to decide on how much money to allocate across financial instruments such as real estate, bonds, equity mutual funds etc.
Scheme performance data -
Long term investments provide valuable data. Such data from the past is called historical data in finance parlance. Yes, it’s true that historical data of a fund or a scheme cannot indicate how well it will perform in the times to come, but it sure can tell how it performed over the years or since its inception. And that is probably the reason why investors look at historical data of a scheme to decide on whether or not to invest in it. This is also pretty obvious because when you come to know how a scheme has performed over three, five or even ten years since its inception, you get a clear picture of how it must have behaved in various bull and bear phases of the market. This information can prove to be extremely handy while selecting the most appropriate scheme for your long-term aim.
Long-term goals can be achieved without hassle -
Financial goals are of two types- short term and long term. Long term goals such as child’s higher education, retirement, wealth generation etc. can only be tackled with long term mutual fund investments, such as those that extend over a period of five to seven years. In fact, you steer clear from the risks associated with mutual fund investments, when you remain invested for a longer period of time.
A successful and prudent investor is he who shows no apprehensions regarding long term mutual fund investments and puts their money in them without fear. But for those, who expect to make money from short term investments plagued by market volatility, this is the right time to reconsider their expectations. Short term funds could be risky!
So, evaluate your long term goals and make investments accordingly!
Mr. Ajay Kumar Jain, M.Sc, Chief Managing Director
Being the Chairman cum Chief Managing Director, he focuses on holistic investment planning and wealth management and tries to make investment planning simpler for retail and HNI investors. Investor education is one of the prime things that Mr. Ajay Jain focuses on as he believes financial education is the foundation of successful investing. With over two decades of experience, Mr. Jain has made a mark in the Indian mutual fund industry due to his compassion and sheer hard work.