Which Type of Mutual Fund is Long Term?

Everyone has different financial goals, and this also means different time horizons. For instance, if you are someone who is saving and investing for retirement – your goals will be for the long term. Here you would probably start in your 20s and end in your 60s. But the same isn’t applicable when your financial goal is a trip, buy a car, a house, or something smaller. Then the tenure of your financial plan becomes faster and shorter. 

Mutual funds have been the latest trendsetters, but can you alter them to your needs? If your goals are short, can you be invested for a short time? If your goals are for the long term – can you be invested for the long term? Here, we will discuss long-term mutual funds and how you can invest in them.

What are Long-Term Mutual Funds?

Long-term investments are intended to fund long-term goals such as college education, homeownership, retirement, and so on. As a result, select a fund that is ideal for wealth growth. Long-term goals have a time horizon of more than ten years, and equity-oriented schemes (>=65% equity allocation) are one of the finest long-term investment options. Equities have a better potential for growth than hybrid and debt funds, despite being more volatile in the short term. A well-diversified equity fund is more likely to provide consistent long-term growth.

If you are still in a daze about it, let’s go through them with tiny steps. Let’s look at it a little more in-depth.

Types of Mutual Funds

Here, we will segregate the funds based on the objective of the investment – since that is what we are looking for over here.

Growth Funds – Money is invested mostly in equities stocks in these schemes with the goal of capital appreciation. They are considered hazardous funds that are best suited for long-term investors. Because they are hazardous funds, they are also appropriate for investors seeking bigger returns on their investments.

Liquid Funds – Money is invested predominantly in short-term or extremely short-term securities, such as T-Bills, CPs, and so on, with the goal of providing liquidity under these schemes. They are thought to have low risk with moderate returns, making them excellent for investors with short-term investment horizons.

Income Funds – These schemes invest money largely in fixed-income instruments such as bonds, debentures, and so on, with the goal of providing investors with capital protection and regular income.

Capital Protection Funds – These are funds in which funds are invested in both fixed income instruments and equity markets. This is done to safeguard the principle that has been invested.

Fixed Maturity Funds – Fixed maturity funds are those in which the assets are invested in debt and money market instruments with maturities that are either the same as or earlier than the funds.

Tax – saving Funds (ELSS) – These are funds that invest predominantly in equity securities. Investments in these funds are deductible under the Income Tax Act. They are considered high risk, but they also provide high profits if the fund performs well.

Pension Funds – Pension funds are mutual funds that are invested in for the long term. They are generally intended to give consistent returns around the time the investor is ready to retire. Investments in such a fund may be split between stocks and debt markets, with equities acting as the riskier component of the investment, offering larger returns, and debt markets balancing the risk and delivering lower but consistent returns. These funds’ returns can be taken as lump amounts, as a pension, or as a combination of the two.

Now, among these funds – you may be wondering which one is for the long term. If you want a short-term investment – your best choice would be debt funds because they can be anywhere from a month to 3 years, and long-term investments go beyond that.

For the long term, there are two choices you can consider over anything else, and they are here.

Long Term Mutual Funds

Here are the two best options you can choose among mutual funds for a long-term investment. But before you just dive right in, you might want to know everything from your provider. If your provider is an AMC, even more, better. Just for instance – you invest in DSP mutual fund; you have experts who can help you choose the types of funds for the long term and help you diversify your portfolio.

1. Equity Funds

Equity funds are mutual funds that invest largely in stocks. You put money into the fund in the form of a SIP or a lump sum, and it invests it in various equities stocks on your behalf. The resulting profits or losses in the portfolio have an impact on the Net Asset Value of your fund (NAV). Of course, there are nuances to consider, but this is the heart of investing in equities mutual fund schemes. However, being a prudent long-term investor might help you learn more about how an equity mutual fund works. Let’s take a closer look at them.

Equity mutual funds invest a significant amount of their assets in equity shares of various corporations in specific proportions. This asset allocation is determined by the type of equity fund and how well it aligns with the investment aim. Depending on market conditions. The asset allocation can be formed entirely of small-cap, mid-cap, or large-cap stocks. After allocating a considerable chunk to equity, the remainder is invested in debt and other money market products. This helps to reduce risk and deal with unexpected redemption demands.

Your decision to invest in mutual funds should be consistent with your investment horizon, risk tolerance, and other goals. It is recommended that you invest in equity funds if you have a long-term aim. It will provide your finances with the necessary time to respond to market moves and fluctuations.

2. Fixed Maturity Funds

Fixed Monthly Plans (FMPs) are closed-end debt funds with a predetermined maturity date. FMPs, unlike other open-ended debt funds, are not continually available for subscription. The fund house creates a New Fund Offer (NFO), which has an opening and closing date. You can only invest in an NFO when it is open for subscription. The offer to invest expires after the closing date.

Certificates of deposit (CDs), money market instruments, corporate bonds, commercial papers (CPs), and bank fixed deposits are common investments for FMPs. The fund manager invests in products with maturities that are close to the desired maturity period.

The Net Asset Value (NAV) of the fund reflects the value of your FMP. You will become acquainted with the FMP’s NAV on a daily basis. Please keep in mind that the fund’s NAV fluctuates on a daily basis due to changes in the economy’s interest rates. As a result, FMPs are riskier than FDs.

FMPs are appropriate for investors who require larger returns than a normal FD but are willing to accept frequent NAV swings. FMPs are low-risk, low-return investments as compared to equity funds. Due to the limited liquidity, investors who are willing to park their money for the duration of the NFO can invest in this scheme.

Conclusion

There are so many options to choose from when it comes to mutual funds, and it gets overwhelming to find just the right plan for ourselves. This price can help you through your long-term financial goals and how to invest in them.