Know if equity investment will give more returns by investing for the long term or short term?

Investors are impatient. They want to become reach within the investment span of two or three years. This is almost impossible especially when you are able to invest only small amounts. Also, the more time one gives their investments to grow the more they can benefit from the compounding effect. Investors must learn to be patient and accept the fact that becoming wealthy overnight is almost impossible. Instead, they should focus on diversifying their investment portfolio across various asset classes and investment avenues so that the overall investment risk is mitigated.

Mutual funds are a great investment tool for generating long term capital appreciation. These are market linked schemes that invest in equity and equity related instruments of publicly listed companies. Apart from this, they might also invest in debt instruments like government back securities, corporate bonds, debentures, reserve repo, CBLO, etc. to achieve their investment objective. Every mutual fund scheme has an underlying benchmark that aims to outperform through a diversified investment portfolio. The fund manager is responsible for ensuring that they actively reshuffle the portfolio and buy credible securities that have to grow potential.

Which mutual funds are ideal for the short term?

Mutual funds can be largely categorized as equity mutual funds and debt mutual funds. Equity mutual funds are open ended schemes that predominantly invest in equity and equity related instruments to achieve their investment objective. Of its total investible corpus, the equity fund invests a minimum of 65% in equity. The remaining portfolio consists of instruments that are in sync with the scheme’s nature and its investment objective.

Debt mutual funds on the other hand invest the majority of their investible corpus in debt and debt related instruments. These funds are usually considered by investors seeking diversification. Debt funds are also considered by investors who are shifting from conventional investment avenues like bank fixed deposits and public provident funds.

Investors can consider investing in debt funds if they have a short term investment horizon. Some investors even consider debt funds like liquid funds, ultra short term funds, and overnight funds for parking their money for a very short term. Such debt schemes offer very high liquidity and carry very low interest rate risk. Since these funds invest in debt instruments that have a short maturity period, their portfolio is less likely to get affected by the fluctuations in the interest rates.

Which mutual fund schemes are ideal for long term investment?

If you have a very high risk appetite and a long term investment horizon, you can consider investing in equity mutual funds. We all know that the stock market is volatile and it fluctuates every day. Since equity funds invest majorly in company stocks, their underlying securities may or may not perform regularly. However, in the long run, equity markets have always corrected and generated long term wealth. This makes equity mutual funds an ideal long term wealth creation tool. Also, long term investing in equity schemes may mitigate the investor’s overall investment risk. Since you will be investing in equity mutual funds for an investment horizon of 5 years or more you can consider starting a SIP. A Systematic Investment Plan (SIP) is a simple and effective way of ensuring that one can invest small fixed sums periodically in mutual fund schemes. Investors are also advised to use the SIP calculator to calculate the total returns that they will earn through SIP investments.

Mutual funds do not guarantee returns and hence investors should seek professional consultation before investing.