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Best Mutual Funds for Long-Term Investing - What to Look For

5 Mins 18 Feb 2022 0 COMMENT

 

Introduction to Long-Term Mutual Fund Investing

Clarity of financial goals is crucial to determine the right mutual fund for you. Depending on those goals, you can pick a mutual fund that can be short term with regular income or long term with eventual capital gains. Mutual funds providing steady income are low-risk and trade in securities with less market volatility. On the other hand, mutual funds looking at long term capital gains are risky and trade in highly volatile securities. Thus, depending on the financial goal and the temperament of the investor, the mutual fund is a balance of risk and return.

How to Balance Risk and Return in Mutual Funds?

In keeping with the financial objectives, an investor should be wary of the combination of risk and return from their mutual funds’ investments in terms of:

  • Risk tolerance: How much is the investor ready to tolerate drastic turns in their investment portfolio? Consider your risk tolerance.
  • Time horizon: For how long is the investor ready to hold the investment for optimal return? Consider liquidity concerns and sales charges.
  • Fund type: Is the investor look for growth or income? Consider your objectives carefully.

Why Mutual Funds are Ideal for Long-Term Wealth Creation?

If the investor’s primary goal is to accumulate capital, they should think about a minimum of five years. Assets held in these types of mutual funds are usually highly volatile and involve more significant risks in trade. However, chances are directly proportional to return. The greater the risks, the larger the return in the long run. Dividend-bearing mutual funds, on the contrary, may offer a small regular income but will not churn significant returns as they do not trade in risky assets. Stocks and bonds are typical examples of capital appreciating and dividend-bearing mutual funds investments.

Additional read: What are the different ways to invest in a mutual fund?

Best Types of Mutual Funds for Long-Term Investment

Systematic Investment Plan (SIP) is the best affordable vehicle to grow your capital. These are small regular payments meant to appreciate your capital over a minimum period of five periods and up to 20 years. Best long-term SIPs are:

  • Debt funds: These SIPs are investments in low-risk debt instruments like government and corporate bonds—for example, ICICI Prudential Corporate Bond Fund.
  • International funds: These SIPs are investments in the shares of foreign companies that are expected to sustain high revenue and earnings in the future—for example, Apple.
  • Liquid funds: These SIPs are investments in debt funds but relatively safer and whose portfolio matures faster within three months—for example, Kotak Liquid Fund.
  • Large Cap funds: These SIPs are investments in large-cap stocks, known as blue-chip stocks, of large-sized companies like Kotak. These companies are projected to have steady growth, and hence investments in their stocks are safe in the long term.
  • Sector funds: These SIPs are investments in sectors that the investor thinks might have more significant potential in the future, such as healthcare.

Conclusion:

Long term investments in mutual plans help in capital growth without immediately lifting your income tax threshold. On the contrary, income from dividend-bearing mutual funds may do precisely that. Long term investments are thus a better way to grow because they usually do not outweigh returns.

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