Long-Term Mutual Fund Investment Strategy

Blog | Investing

If you're wondering how to pay for your financial goals that are seven or more years away, it may be time to consider a long-term mutual fund investment strategy. Staying invested in equity mutual funds for the long-term may help you grow your wealth to beat inflation and withstand market changes. 

This article looks at how you may benefit from staying invested in mutual funds in the long run. But first, let's understand what a long-term investment is and how such a mutual fund investment may suit you in the long run.


Understanding Long-Term Investments

A long-term investment is an asset that you hold over an extended period. While the duration of 'long' depends majorly on your perspective of investments, it usually refers to a timeframe of seven years or more in mutual funds.  With a long-term investment strategy in mind, you have the opportunity to take more risks as investing for the long term may help you mitigate risks and build an aggressive portfolio of funds. As an investment strategy, long-term investing   also known as buy-and-hold strategy can be specifically employed to attain goals that are far ahead in the future.


Why Equity Mutual Funds Make Sense for the Long Term

One of the primary concerns of most investors is volatility, which measures the degree to which prices change over a period. Volatility refers to price swings. This means the higher and more frequent an investment's price swings, the greater is its volatility.

Any investment with high volatility in the short run also holds an increased risk due to price swings. However, short-term market volatility does not always indicate a long-term trend. Among the different types of mutual funds, equity mutual funds are regarded as the most volatile. However, in the long run, these funds display patterns of growth or stability.

When engaging in a long-term equity mutual fund strategy, time plays an essential role. If you hold your online mutual fund investments for a lengthy period, they could exhibit lesser volatility than if they were held for shorter time frames.

The longer you stay invested in mutual funds, the more likely it is that your investment will endure down-market periods. Investing in equity funds for the long-term can also provide you with tax advantages on capital gains. Additionally, it also saves you from additional expenses such as exit loads.

If you invest in the right equity or equity-oriented funds, your investments could witness a spurt in growth and enable you to accomplish many of your financial goals. However, to do so - you need to remember that investing is a marathon and not a sprint. When you decide to invest in mutual funds, ensure that you have a sound investment plan that's aligned with your risk appetite, investment goals, and the duration you wish to stay invested in - until you meet your goals.


Role of Equity-Oriented Mutual Funds for Long-Term Growth

Equity funds invest in shares of different companies. Typically, an equity-oriented fund aims to earn returns on your invested amount over the long run. Therefore, if you're looking to plan for your long-term financial goals and benefit from inflation-adjusted returns, equity mutual funds can be an excellent choice. Within equity-oriented funds, you can choose from:

  • Large-cap Funds
  • Large & Mid-cap Funds
  • Mid-cap Funds
  • Small-cap Funds
  • Multi-cap Funds
  • Dividend Yield Funds
  • Value/Contra Funds
  • Focused Funds
  • Sectoral/Thematic Funds
  • ELSS (Equity Linked Savings Schemes)


In addition to this, there are specific hybrid funds that can become an integral part of your long-term investment portfolio. Moreover, Hybrid funds offer the dual benefit of capital appreciation and income from debt securities.


SIP - Long-term Investment Approach to Wealth Building

A convenient and easy way to build your corpus over time is to invest regularly and in a disciplined manner. In this regard, choosing a Systematic Investment Plan [SIP] as a mode of investing in mutual funds can help you achieve your financial goals.

SIPs offer a wide range of benefits — they are lighter on the wallet and do not require you to time the market. They also allow you to build wealth through the power of compounding. Besides, the rupee cost averaging feature is also instrumental in helping cut down the market volatility of equities.

In addition to choosing an SIP as your investment route, let's look at how you can strategize your mutual fund portfolio for the long run.


  • Evaluate Mutual Fund Performance

Selecting a mutual fund with a good track record is a smart move when choosing the right equity fund for your goal. Typically, when examining mutual fund performance, investors and advisors tend to rely on the past performance. However, other factors such as fund management, fund style and risk must also be looked into.

When evaluating mutual fund performance, assess its portfolio construction and management as well as the risks involved. You may also want to factor in additional qualitative features such as the reputation of the fund house and fund management experience. 

When observing returns, review measures such as standard deviation, upside downside capture and Sharpe ratio. Look into the fund fact sheet that details the scheme's performance, how the money is deployed in securities, the size and investment details of every scheme managed by the mutual fund etc. Reviewing the fund fact sheet can be an ideal way of monitoring your mutual fund investments.


  • Monitor the Fund Performance Regularly

All mutual funds list their Net Asset Value [NAV] on relevant online media. To understand how your mutual fund is performing, compare the fund's performance with other funds in the same category. You can also compare the fund's benchmark index - the index selected by the mutual fund company that serves as a yardstick for its returns. However, when comparing the mutual fund schemes performance, you may want to look out for changes in the management team or a high churn/turnover in the fund portfolio.


  • Look at Quantitative and Qualitative Factors

In addition to conducting a peer comparison, look into quantitative and qualitative factors to help you narrow down on a mutual fund scheme that may be best suited for you for the long term.

Quantitative factors include:

  • Overall returns across different time horizons
  • Fund performance across market cycles
  • Study of risk ratios to determine the level of risk the investors are exposed to
  • Understanding adequate risk-adjusted returns


Qualitative factors include:

  • The investment style of fund managers
  • The total number of schemes managed by the fund manager
  • The total number of mutual funds managed by the fund house
  • Overall work experience and expertise of the fund manager/management
  • Reputation and efficiency of the mutual fund house in managing investor money


Market Ups and Downs — Part of the Long-Term Game

As with any investment, the risk with long-term investments in mutual funds too - is that they can fall in value at any time. However, if you hold it for the long term, you will give it an opportunity to recover. This characteristic stacks the deck in your favour. That means, even if a mutual fund investment may be down 20% in the next five years, it may hold the potential of not only recovering the fall but also delivering superior returns doubling or tripling in value or more in the next 10 to 15 years.

Therefore, a long-term investment strategy gives you a chance to overcome short-term market dips in return for potentially higher returns. As nobody can predict the future or determine how asset classes or a market investment will perform, it may be best to stay invested at all times.


Factors to Consider When Building a Long-Term Investment Portfolio

When setting up your investment strategy, choose a style that fits your unique needs. Ask yourself what your investment horizon is? What kind of returns do you want to receive? What degree of risk are you willing to tolerate? What do you plan to achieve by investing in this particular fund?

When building your long-term mutual fund portfolio, it can help to know that investing at an early age gives your assets the potential to grow the longer they are invested.

Financial experts encourage young investors to begin as early as possible, preferably with their first salary, to ensure better financial standing in the future. For instance, if you start investing in mutual funds at the age of 20, you could have significantly larger returns, several decades down the line, than someone who began investing at the age of 30. Regardless of your preference, commit yourself to a long-term investment strategy that best suits you and plan your investments in accordance with securing your future.

Consider enlisting the services of an expert financial advisor when selecting equity investments. Building a long-term investment mutual fund strategy requires faith, patience, determination, and the ability to stay calm and collected, regardless of market swings.

Given today's fast-changing financial world, the recommendations of a financial professional can help you narrow down your choices and remain focused on your long-term objectives.

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