Mutual funds for Long-term investment

Long-term investment in MFs will mean higher returns since your money gets that much needed exposure and nurturing for it to work hard for you. Remaining invested in the 3-7 years bracket will be rewarded with appreciation in the NAV (Net Asset Value) of the units held.

Tax Benefits

If you’re looking at ELSS (Equity Linked Savings Scheme) which locks the investment for at least three years, you can also claim deduction under the prevailing section of the Income Tax Act.

Instant Liquidity

When the units held under the fund become due or when the financial goals change, you can easily buy/sell units at prevailing NAV to suit your portfolio.

Flexibility

Based on the fund and its terms, you can rejig the portfolio without hassles. Some AMCs let you reallocate the exposure between debt and equity or vice versa during the term at regular intervals with/without charges.

Now that you’re well acquainted with the mechanics and understood how MFs can help to fulfill long-term goals, it's time to invest in one. The easiest way to start the journey is by SIP (Systematic Investment Plan) where you invest a fixed amount every month. One can start with as less as Rs. 2,000 on a monthly basis depending on the availability.

Here are the categories of mutual funds on the basis of investment objectives

• Growth or Equity Funds: A significant part of the corpus of growth or equity funds is invested in stocks. Long-term capital appreciation is the investment goal of equity funds. When investors purchase equity funds’ shares, they gain ownership of every security in the portfolio of their fund. At least 65% of an equity fund’s corpus gets invested in equity and equity-related instruments. The investments made in equity funds could be spread across a variety of industries, or it could be focused on certain sectors. Investors who have a high-risk appetite and want long-term capital appreciation will find equity funds to be an ideal investment option.
• Income or Debt Funds: The investments made in debt funds are usually put into bonds, money market instruments, government securities, and corporate debentures. At least 65% of the corpus of these funds is invested in securities that provide fixed income. The risk involved with these funds is relatively lower and they are also less volatile in comparison with equity funds. They also offer regular income, which makes them ideal for investors who want to ensure their capital is safe while enjoying moderate growth.
• Hybrid or Balanced Funds: These funds make investments in fixed income instruments as well as equities in keeping with the scheme’s investment objective. Balanced funds offer stable returns as well as capital appreciation. Investment in balanced funds is made equally in fixed income securities and equities, which makes them perfect for investors who seek moderate growth as well as income. Balanced funds usually invest about 40% in debt instruments and 60% in equities.
• Liquid or Money Market Funds: Liquid funds or money market funds as they are also called, make investments in safe short-term instruments like Commercial Paper, Certificates of Deposit, and Treasury Bills for a timeframe of under 91 days. The objective of liquid/money market funds is to ensure capital is preserved, moderate income is generated, and liquidity is easy. Liquid funds are perfect for individuals as well as corporate investors who seek moderate returns.
• Tax-Saving Funds: These funds offer tax benefits to investors under certain provisions of the IT Act, 1961. Tax-saving funds are growth-oriented and investment through these funds is made mainly in equities. Similar to equity funds, tax-saving funds are ideal for investors who have a good risk appetite and look for capital appreciation between the medium and long term.
• Sector-Specific Funds: These funds make investments in securities of certain industries or sectors. The performance of the relevant industries or sectors determine the returns provided by these funds. For instance, if majority of the money in a particular fund has been invested in the IT industry or pharmaceutical industry, the returns will be determined by the performance of these industries.
• Index Funds: These funds basically replicate performances of certain indices, like the S&P CNX Nifty index or the BSE Sensex. Stocks which represent the index comprise the portfolio of index funds and the returns offered are somewhat the same as the returns offered by the index itself.