When it comes to mutual funds in India, there are two common beliefs among investors. While the larger group of people think that mutual funds are best for long term investment, a smaller group believes that it gives more returns in short term. Both these thoughts are correct but about different mutual funds. There are different mutual funds and mutual fund investment strategies that will work in the long term and short term. Let’s explore both options and see how you can figure out what will work for you.
Long term investment options
Most of the mutual fund investment options are said to work better if you stay invested for a longer term. This is especially true in the case of equity funds. Equities are known for their constant ups and downs in the stock market today, but an equity mutual fund is meant to offset these in the longer term. Not only that, when you stay invested for a long time, compounding can do wonders for your money.
Let’s take an example to understand this better. Imagine that you have invested Rs. 1 lakh in an equity mutual fund as lumpsum. For ease of calculation, let’s assume that this mutual fund gave you 12% returns each year for the first two years. Here, the return on the second year will be for the compounded amount at the end of the first year, which is Rs. 1.12 lakh.
At the end of the second year, your investment will stand at Rs. 1,25,440.
If we take the profits alone, even when the returns stood at a steady 12%, you earn Rs. 12,000 profit in the first year while Rs. 13,440 in the second year, thanks to compounding.
- SIP investments
SIP is another popular form of mutual fund investment in India where a long-term investment is necessary. In SIPs, you invest a fixed amount of money every month to slowly build your wealth. Since you are investing only a smaller amount of money, it could only have a minuscule amount of growth in the short term. For SIPs too, compounding is of great importance.
- Short term mutual funds
Short terms funds have maturity dates ranging from 15 to 91 days. More than capital appreciation, these are considered a safe place to park your money as most of these funds invest in low-risk securities. At the same time, they traditionally tend to give a much larger profit than a regular savings account.
- Liquid funds
Liquid funds are one of the most common short term mutual funds in India. They invest in short term, low risk, interest generating securities like treasury bills, commercial paper, certificate of deposit etc.
How to choose a term?
You should choose a term according to your investment goals and risk appetite. If capital appreciation is your goal, choosing a fund that works for the long term could be more beneficial but if you are looking to park your money for a shorter period, short term funds, such as liquid mutual funds, could give you more interest than a regular savings account or even a fixed deposit.
If you have trouble figuring out your investment horizon, it’s a wise idea to consult a financial expert who will talk with you and help you figure out the same. If you are still not invested, waste no time! Get expert help and start investing today in MF online!