How mutual funds should be considered for long-term investment?

Mutual Funds are an excellent investment vehicle when it comes to building long term wealth. Generally observed that equity mutual fund has potential to provide long term risk adjusted performance...

When it comes to investing for your future, there are a lot of investment vehicles to choose from. Although there is no specified formula or handbook that investors are expected to follow, there is one general rule that impacts your mutual fund performance: Invest for the long term.

When you invest for the long term your mutual fund performance harnesses the power of compounding. When you make a mutual fund analysis, your age and financial responsibility play an important part in your investment decisions. Since youngsters can afford to have an aggressive stance in investing as they have fewer financial responsibilities such as retired parents, a spouse, children, or car or home loans to pay off, they are encouraged to start their investments early. A young individual thereby, is able to withstand the market swings. Moreover, investing in equity for the long term allows you to take advantage of compounding in your mutual fund performance (i.e., the returns begin earning returns thereby adding to the principal).

Compounding involves two factors that make it work: the reinvestment of earnings, and time. The more time you give your investments, the more chance to build your wealth.

Although there have been ups and downs, historical mutual fund performance over the last 5 years and beyond needs to be reviewed before you align your portfolio for the long term.

Let’s understand the benefits of investing with a long term horizon:

• Long term investments carry specific financial goals and give options to investors to invest small amounts at regular intervals per month which has the potential to provide long term risk adjusted returns. An SIP is one of the best investment vehicles.

 • When you make a mutual fund performance comparison, the rate of returns is likely to fluctuate and remain volatile. However in long-term investments have potential to provide risk adjusted returns.

You have the potential to correct investment mistakes in the long term. Anyone can be a long-term investor; you don't have to be an investment expert to invest in well-run businesses for the long term. While it is natural that you will make mistakes; even the best investors have been wrong. But a regular review of mutual fund performance indicators every six months can help correct at least some of these mistakes. In addition, it is important to hold on to investments that have historically demonstrated strong growth.

 

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.