Eating tasty but not so healthy food may be temporarily pleasurable but on a long-term basis, may not be fruitful later in life. On the contrary, not so tasty but healthy food is a smart investment for great health, even in your old age. The same view holds true when it comes to long term equity mutual funds. They may seem volatile in the short-term but in the long term, they make way for solid wealth creation.
Time is of essence in choosing the right investment strategy. When you invest long term, the market goes through a period of lows and highs, and finally due to the law of averages, the losses in the short term, are evened out. Long term horizon enables fund managers to strategically work the investments. For instance, when it comes to ELSS (Equity Linked Savings Scheme), the fund managers take advantage of the three-year lock-in period to make smart investment calls; they are not subjected to a scenario wherein they have to give back the money to investors.
Here are the benefits of investing with a long-term perspective (above 5 years) –
- Optimum utilization of SIP – Short-term investments are known to witness a quick upsurge followed by an equal possibility of downside. When an investor invests in an equity mutual through systematic investment planning (SIP), the total investible amount is pooled in a fund at regular periods of time (for instance, monthly). When the market is bullish, one buys less units at the same price and when the market is on the downside, more units are bought at the given price. Through rupee-cost averaging, the investor is able to even out market risks on a long term.
- Diversification of investments – The right asset allocation is the key to long-term wealth creation. So when you are investing for the long term, you are able to chart out a strategy and decide how much money you will allocate across various investment instruments like various types of equity mutual funds, bonds, real estate; etc.
- Historical data of performance – Though historical performance is not a perfect indicator of how mutual funds will behave in future, it is quite helpful to find out how a particular fund has behaved across the years. When you find out how an equity mutual fund has been performing across 3, 5 and even 10 years, you come to know how it has performed in various bull and bear phase of the market. This information can be vital in choosing the right fund for your long-term goal.
- Long term goals warrant long-term investments – Long-term goals like retirement planning, wealth creation, etc. are possible with investment period that are more than 5 to 7 years. In fact, the longer you stay invested, the lower is the risk associated with equity mutual funds.
Successful investors are always the ones who are in for a long-haul rather than speculative gains on a short-term, marred with acute volatility. So, decide on your long-term goals and choose your equity investments accordingly.