Steps to choose best long term mutual funds to invest in

Mutual Funds can be classified as long-term and short-term funds:

Long-term mutual funds: These are funds which can help you create wealth over a long period of time so that you can easily meet your financial goals. Usually they are equity-oriented funds. This is because equities can help you generate the returns required to build the kitty required for your goals. Such funds may be volatile over brief periods. However, over the long term, they have the potential to outperform all other modes of investment.

Short-term mutual funds: Short-term funds are those comparable to fixed deposits. They are less volatile than equities. Usually they are Liquid Funds or Short Term Debt Funds which invest in debt papers of below six months. Ideally such funds may be used for parking your liquid money before it is deployed for a specific purpose.

Investing in equity-oriented funds for the long term (5 years and above) has the potential to offer attractive returns. Besides, the longer you stay invested, lower is the investment risk. The key to successful long term investing in selecting the right equity-oriented funds and remaining invested for a long period of time. Here are some pointers for picking long-term mutual funds:

• Consider Index Funds: Index funds emulate a stock market index such as the BSE Sensex, NSE Nifty, etc. and usually provide returns almost identical to that of the underlying Index. The advantage of an index fund is that the expenses charged to the fund are very low.
• Benefits of Actively Managed Funds: Fund managers of such schemes try to beat the index by selecting stocks based on in-depth research. While there is no guarantee that such funds would actually manage to outperform their benchmark index consistently, in general, over the long-term, a majority of actively managed funds have outperformed their underlying indices in India.
• Look up the Track Record: While selecting actively managed funds, it is best to check-out the track record of the funds, particularly for 5-year and 10-year periods. This is publicly available information on various websites which track and rank mutual funds.
• Risks of Smaller Companies: Large-cap funds (they invest in large companies) and Multi-cap funds (which have a mix of large and smaller companies in their portfolio) carry lower risk as they are less volatile compared to Mid-cap and Small-cap funds.
• Diversification is important: It may be best to invest in at least two or three funds rather than put all eggs in one basket. Controlling your risk is as important as going after returns.

Benefits of long-term mutual funds

Investing in long term mutual funds can be a transformative step in building wealth over time. These funds are designed for those with a long-term horizon, offering the dual benefits of capital appreciation and compounding returns. By holding investments for an extended period, investors can ride out market volatility and benefit from the upward trajectory of equity markets. In India, where financial markets are evolving, long term mutual funds have become a preferred choice for those seeking sustained growth. They provide a disciplined approach to investing, ensuring steady returns while mitigating the impact of short-term market fluctuations.

For those looking to diversify their portfolios, long term mutual funds offer a wide range of options, from equity and hybrid funds to thematic and sector-specific funds. By choosing the best mutual fund for long term, investors can align their goals with suitable schemes that match their risk appetite and financial objectives. The right fund not only secures financial goals like retirement, children’s education, or property purchase but also ensures tax efficiency under Section 80C of the Income Tax Act.

Additionally, long term SIP plans (Systematic Investment Plans) are an excellent way to invest in these funds. SIPs enable investors to contribute small amounts regularly, making it easier to maintain a disciplined savings habit. Over time, these contributions accumulate and grow, leveraging the power of compounding. Selecting long term SIP plans ensures that investors can benefit from rupee cost averaging, which reduces the overall investment cost in fluctuating markets.

Therefore, identifying the best mutual fund for long term and sticking to long term SIP plans can lead to significant financial security. With proper research and alignment to personal goals, investing in long term mutual funds becomes a robust strategy for creating a prosperous financial future in the Indian context.

In order to be a successful long-term investor, it is very important to maintain the discipline of investing irrespective of market conditions. The day-to-day news flows makes investors nervous and they tend to pull out of equities. Such investors miss out on the long-term benefits of equity investing.