There is no doubt that mutual fund investments are a lucrative way of generating wealth. However, the duration for which one stays invested in a mutual fund has a direct impact on the returns generated. Having a long-term investment plan is not usually common with a lot of individuals who invest in mutual funds. Moreover, most investors looking to make long-term investments would much rather park their funds in government-run savings schemes.
What most investors do not realise is that the time that one stays invested in a mutual fund plays a key role in the ultimate goal of wealth creation. Another factor that impacts one’s growth trajectory with long-term investments is the mode of investment - lump sum or Systematic Investment Plan (SIP). The mode of investment has a direct impact on the asset allocation and choice of funds.
With the exception of Equity Linked Savings Schemes (ELSS), most mutual fund investments do not have a lock-in period. Therefore, investors are free to sell their units as per their choice.
The following are the top 5 reasons to make a long-term investment in mutual funds
- Achieving financial goals
- Effectively deal with market volatility
- Power of compounding
- Tax benefits
With long-term investments, investors have a higher likelihood of gaining steady returns that can help achieve financial goals. Furthermore, long-term investments lower’s the investor’s risk of losing funds during the course of their investment. Building a corpus for retirement or saving up for a child’s higher education is easier when a long-term investment is made.
Funds in a mutual fund will at some point be subject to market volatility. This poses a higher risk when investments have high volatility. When an investment is made for a short term, it poses a high risk in terms of growth. With long-term investments, the fund is able to overcome the rises and falls of the market and decreases the likelihood of losing investment.
The power of compounding is a benefit that a number of investors overlook when they make short-term investments. The interest earned on a long-term investment is usually reinvested in the fund and generates more returns. Over the course of the investment tenure, the returns from the investment will be significantly higher than those earned from a short-term investment.
Long-term investments decrease the investor’s tax liability. In India, capital gains are split into 2 categories - long-term capital gains and short-term capital gains. Short-term capital gains have a higher tax rate when compared to long-term capital gains. Additionally, returns that are higher than Rs.1 lakh are subject to taxation.
Funds that are traded more often tend to increase the expenditure on the investment. With long-term investments, the additional expenditure incurred on trading units is minimised.
One of the key aspects that all investors need to bear in mind is the fact that regardless of the tenure of investment, all mutual fund investment are subject to a certain level of market risk. The tenure of the investment merely decreases the risk that one’s investment is likely to face.