Why to Invest in Mutual Funds for Long Term?

Looking at the ease with which you can shop, order food, and buy almost anything from the comforts of your home, it is difficult for consumers to resist and choose to save for their future. But we must not forget that our prime responsibility is to secure the future for ourselves and our loved ones. Even if you save in small amounts regularly and for a longer duration, it can help you build a decent corpus for your future requirements.Let’s understand why a long-term Mutual Fund (MF) investment is advantageous for the investors:

Below are some of the reasons that make mutual funds more profitable in the long-run:

• The Benefit of Compounding The benefits of compounded interest lies in the fact that earnings generated over a period are reinvested. When you choose to invest for a longer horizon, the power of compounding helps you in maximizing the returns and investment growth.For Example: Let’s assume that you invest Rs 200000 in a mutual fund for the first year and earn a compound interest of 10% for that year. The principal amount for the second year will now be 200000 + 20000( 10% of 2000000) = Rs 220000. Likewise, the principal amount will keep growing, leading to higher returns.
• Mitigation of Market Risks Whether you choose to invest in bonds, equities, or other financial instruments, it is not possible to stay immune from market volatilities. When you invest for a longer term with a systematic approach, the volatilities can be managed as it tends to even out with time.

Below are some of the strategies/ points you must keep in mind while investing in long-term mutual funds to improve the chances of profitability.

• Lumpsum investments are more beneficial when the market is low, whereas a SIP investment spreads overtime during both low and high market phases.
• It is easier to invest in SIP since smaller amounts are to be invested. Also, It is less stressful and does not require close monitoring all the time.
• SIP helps you to stay disciplined in your investment. Many banks allow automatic debit from your account as per your instructions.

• Diversify Your Portfolio It is not advisable to invest in multiple funds that invest in similar types of securities(stocks, gold, bonds, etc.). Rather you must invest in mutual funds that are dissimilar in terms of types of securities, industry or market capitalization, etc. The idea behind diversification is to spread the risk across different types of securities in a single portfolio.
• Consider Risk Appetite and Financial Goals While Portfolio Planning You must plan your portfolio, keeping in mind your risk-bearing capacity and the seriousness of your goal. The risk appetite must be based on your financial standing and current age as well. There is a thumb rule to find the ideal debt investment according to your age. As per this rule, your debt fund allocations must be equal to your age. Hence, as you grow older, you must move towards the debt from equity.For Example, if your age is 30 years, you may include 70% of equity funds and 30% of the debt, cash, and other stable instruments in your portfolio.Also, if you are creating a corpus for crucial goals like marriage, retirement, etc., you must keep your equity investments low, whereas it may be higher for less crucial goals such as travel plans.
• Lumpsum Investment Vs SIP You can invest in mutual funds either through a systematic investment plan(SIP) or by making a one-time investment(Lump sum). A SIP calls for periodic investment such as daily, weekly, monthly, and so on. We must remember a few things while choosing an investment method:
• You may choose the investment route based on your income, financial stability, goals, and risk appetite.
• Review and Rebalance the Portfolio Regularly Since you are investing for a longer duration, you must keep a check on the funds in your portfolio. If any fund looks non-promising in the future, you may consider dropping it and rebalance the portfolio again.

A short-term investment in mutual funds may be profitable sometimes, but if you are looking for wealth creation to address your important financial goals, you must plan for a long-term investment. A well-diversified portfolio designed as per your risk appetite and goals can potentially generate the expected returns in a longer time horizon.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.