The power of compounding is a beautiful concept and a long-term investment strategy is a driver behind it. You invest and let your money make money for you over a longer time frame.
However, nothing good comes on a platter.
A successful long-term investment strategy requires a bit of homework. Study your risk and goals, and research the investment products to go a long way with a long-term mutual fund investment strategy.
The awareness amongst Indian investors about mutual funds is still catching up. As of March 2021, individual investors held Rs.17.27 lakh crores in mutual funds, an increase of 33.84% over March 2020.
In this blog, we will share some ideas for using mutual funds as a long-term strategy.
There is no fixed tenure to define the ‘long term’. For someone in their 30s planning for their retirement, the long term could be 30 years. The definition of long-term varies based on individual goals. Most investors consider a period of 3-5 years or more as a long term.
Long-term investments help secure funds for the future. Also, one can start small and build a sizeable corpus because a long-term investment gives enough time for assets to appreciate.
Here is an example.
Let us say a mutual fund is showing a 10-year historical return of 12%.
If someone had invested Rs 10,000 in this mutual fund ten years ago, their investment would be worth Rs. 22,000 (more than double). Note that past performance is not an indicator for the future, but the math just shows why long-term investment is good.
There are several types of long-term investments. The first step in creating a long-term strategy is to define what is long-term for you. Note that there can be multiple long-term portfolios with different objectives.
For example, you can plan a portfolio for retirement depending on how many years you are away from retirement. You can prepare a separate long-term portfolio for your kids’ education depending on how much funds you will need, say after ten years.
Perform extensive research on different types of long-term investments and their returns. While it is known that equity funds have a higher risk-reward ratio than debt funds, even under the broader categories there are at least 10 different funds of varying natures.
For example, within equity mutual funds, a small-cap mutual fund is riskier than a large-cap fund.
In the case of debt funds, credit risk funds are riskier than most other debt fund categories.
You should also assess your risk levels too. It is important to do so as your risk level should be in line with the risk level of your investments.
The best long-term investment strategies are unique and do not mirror other strategies. Once you have clarity on your long-term goals and your risk profile, you can decide how much money you want to invest in each type of mutual fund. Your long-term goals can be varied: retirement, higher education, marriage, buying a house, children’s education and more. Invest in funds accordingly.
Say you are in your 30s, your retirement portfolio can undergo a change as and when you near retirement depending on the change in your risk level.
As a golden rule, continuously diversify your investments. Diversification helps you to get the best of most assets. Even if you have a very high-risk appetite, having 100% exposure to risky products may land you in trouble. It is also not a wise decision to have a heavily skewed investment portfolio. It helps to maximise returns over a longer time frame.
Read More on Groww: What Is Diversification?