invest in equity mutual funds for the long term
When
it comes to money management, financial experts always emphasise the
importance of financial goals. These goals are of three types -
short-term (1-3 years), medium-term (4-7 years) and long-term (more than
7 years). The financial instrument you need the focus on is chosen
based on the type of the goal you want to achieve.
Equity
mutual funds are the best for those who are looking for long-term
goals. In other words, when you invest in equity mutual funds, you
should do so for the long term. Only then would you get more bang for
your buck. Moreover, unlike the fixed income instruments, equity
investments are not directly influenced by inflation and interest rate
vagaries.
If
you track on a daily basis, you will see the equity markets are very
volatile. If today it is up, tomorrow it can be down. But, on a
quarterly basis, you won’t notice as much volatility. In short, track
the markets for the long term (more than seven years) and you will
realise that the market is not as volatile as it seems on a daily basis.
In short, the longer you hold your investment the lesser the volatility
and higher the returns.
For instance, check out the
Sensex movement in the first two months of the current calendar year.
You will see the volatility is very high.
At
the same time, check out what happened over seven-year period from from
1 January 2009 to March 2016. You will see the volatility you is much
lesser but returns are higher.
Pankaj
Mathpal, Mumbai based Certified Financial Planner says, "Equity by
nature face volatility. In the short term, they face more volatility,
due to various factors like the political issues of the country, global
economic conditions and the like. It's for the long term span that the
volatility of equity is felt, hence investing in equity MFs for the long
term gives a better chance of earning good returns."
Among
equity funds, diversified funds have given mouth-watering returns for a
decade or so. Investing in diversified equity funds is for those who
want to invest across sectors. Among such funds, large-cap funds are
known to give stable returns.
For those who are ready to
risk, mid-cap funds stand a chance. And, for those who are willing to
stomach a significantly higher risk than mid-caps, small-caps have
performed well for the last three years.
Ideally, if you
don’t understand finance, it’s better to go for multi-cap funds. Keep in
mind, that funds which focus on small and mid caps should not be the
core of your portfolio . Large-cap funds should be the core of your
portfolio, as such funds provide stability, especially in the long term.
If
you select the right equity MF, that could even give you better return
than the benchmark indices. In short, when you hold equity MFs for long
term, you invest in the best tool to keep your investment away from the
reach of the inflation monster, as well from worrying of daily
volatility.
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