Mutual funds are pooled investment vehicles wherein asset management companies raise the capital by collecting money from different investors. While investing in mutual funds could be beneficial for you, there are a few things that you need to consider when it comes to mutual fund investments.
Mutual fund investment timing
In a general mutual fund setting, investors are looking to benefit from short-term differences. These differences post-investing in mutual funds account for the variance between closing NAV and component stocks’ market prices. Timing plays a crucial role here as the right time is directly proportional to getting attractive returns.
Timing is one of the risk factors wherein you as an investor could miss out on potential beneficial movements in the stock price due to mistiming your investments.
What is a holding period for mutual funds?
A holding period is essentially the duration between the purchase and sale of a mutual fund.
- A mutual fund holding period of one year or less is considered as short term
- Mutual fund investments beyond the period of one year are classified as long term
Period of holding for mutual funds
The minimum holding period for mutual funds could be classified based on the characteristics of a particular mutual fund. The following are the key takeaways:
- Generally, equity funds are held as long-term investments as they are the key drivers for wealth creation in a portfolio. It takes time for these funds to meet the requirements, and they usually outperform other asset classes by a good margin only when certain conditions are favourable
- Certain well-diversified equity funds tend to demonstrate the desired results within five years. Let’s say that if your five-year equity fund SIP is maturing in time for your child’s education instalment, in that case, only this period becomes the tenure for holding the fund suitably
- Debt funds, conversely, are held with the objective of safety, security, and liquidity in the short term. The approach here is to benefit from interest rates
- When interest rates are expected to see a rise, the holding period is reduced and similarly, when rates are expected to fall, the period of holding is extended.
Investing in mutual funds could be a better option for you to meet your short-term and long-term financial goals. Understanding the timing and holding period of mutual funds only helps to make the most of your investment.
A simpler way to make your investment decisions work for you is by reaching out to a financial expert who can curate investment plans that are unique to your goals and risk appetite.
Reach out to one today.