Why You Should Invest In Mutual Funds For The Long Term?
Many analysts advise investors to remain invested in the equity market for a long period of time. This is because whatever the investment avenue maybe, it has been noted that long-term investments reap higher results. It is not possible to generate wealth overnight. With equity investment, patience is the key. Although an equity portfolio carries higher risk as compared to debt securities, the returns are also significantly higher. Based on their long-term financial goals, investors are advised to invest in equity and to remain invested for a longer duration.
Investing in equity mutual funds is basically investing in equity stocks of different companies. Since the fund managers invest on behalf of an investor, they gain complete knowledge of the market and analyze the performance of the stocks before making an investment decision. In order to completely diversify the portfolio, they invest in different sectors. The benefits of investing in equity mutual funds for long term are discussed below:
• Low risk-high return trade-off
• Capital appreciation and dividends
• Compounding of interest
• Benefits of diversification
• Low impact of market movement
Low risk-high return trade-off
With equity mutual funds, the long-term returns are high and the risk is minimal due to a diversification of fund. The volatility experienced by mutual funds is always short term, and historically, the returns have averaged out in the long term.
Capital appreciation and dividends
With an investment in equity mutual funds, you may gain in the form of capital appreciation and dividends. When the company generates higher revenues, it distributes the same in the form of dividend amongst shareholders of the company. But it is important to note that it is practically impossible for any company to generate good returns within a period of two or three years. Even a successful company takes time to achieve success, sustain the business, have a steep growth curve, and distribute a share of it amongst investors. Hence, it does not make sense to invest in a fund today and look for a return within a period of three or six months.
If you look at some of the most successful companies in the country, you will notice that they have taken more than a decade to reach the top. It is also important to note that you may achieve returns even in the short tenure, but if you seek higher returns, you need to be patient and give it time.
Compounding of interest
The biggest benefit of an equity mutual fund investment is the compounding of interest. Equity investment helps generate significant wealth in the long tenure due to the compounding of interest. This allows investors to earn interest not only on the principal amount, but also on the interest generated on the same.
Benefits of diversification
Equity mutual funds invest in small-cap, mid-cap, and large-cap companies. This allows an investor to gain benefit from the performance of different sectors. As one segment outperforms the other, the investor will benefit from different market caps. Directly investing in small and mid-cap stocks may be risky, which is the main reason investors prefer mutual funds.
Low impact of market movement
Equity funds are known to offer the benefit of compound interest and the ability to gain from the market movement. If the market is high, you will be able to generate significant wealth in the form of capital appreciation. That is why it is advisable to remain invested for a long tenure and not make a quick decision when the market is at the extreme.
Equity mutual fund investment, be it in the form of small-cap or mid-cap funds, is impacted by market volatility. Therefore, it is important to stay in the market for a long-term investment to keep risks at a minimum and wash out the impacts of market movements.
As an investor, it is important to develop long-term financial goals and make the right investment choices to achieve the same. In order to successfully grow your wealth, you may set up a Systematic Investment Plan (SIP), which will allow you to invest a regular sum into equity mutual funds each month. Before going for an equity mutual fund investment, ensure you study the market movement followed by the performance of the stocks of specific companies. In order to invest in mutual funds, it is important to analyze the three-year and five-year returns of the stocks and not simply invest by looking at the fund’s performance in the last few months.
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