Invest in equity mutual funds for the long term for best returns

When it comes to money management, financial experts always emphasise the importance of financial goals. These goals are of three types - short-term (1-3 years), medium-term (4-7 years) and long-term (more than 7 years). The financial instrument you need the focus on is chosen based on the type of the goal you want to achieve.

 Invest in equity mutual funds for the long term for best returnsEquity mutual funds are the best for those who are looking for long-term goals. In other words, when you invest in equity mutual funds, you should do so for the long term. Only then would you get more bang for your buck. Moreover, unlike the fixed income instruments, equity investments are not directly influenced by inflation and interest rate vagaries.

Why is it so?

If you track on a daily basis, you will see the equity markets are very volatile. If today it is up, tomorrow it can be down. But, on a quarterly basis, you won’t notice as much volatility. In short, track the markets for the long term (more than seven years) and you will realise that the market is not as volatile as it seems on a daily basis. In short, the longer you hold your investment the lesser the volatility and higher the returns.

For instance, check out the Sensex movement in the first two months of the current calendar year. You will see the volatility is very high.

At the same time, check out what happened over seven-year period from from 1 January 2009 to March 2016. You will see the volatility you is much lesser but returns are higher.

Pankaj Mathpal, Mumbai based Certified Financial Planner says, "Equity by nature face volatility. In the short term, they face more volatility, due to various factors like the political issues of the country, global economic conditions and the like. It's for the long term span that the volatility of equity is felt, hence investing in equity MFs for the long term gives a better chance of earning good returns."

Among equity funds, diversified funds have given mouth-watering returns for a decade or so. Investing in diversified equity funds is for those who want to invest across sectors. Among such funds, large-cap funds are known to give stable returns.

For those who are ready to risk, mid-cap funds stand a chance. And, for those who are willing to stomach a significantly higher risk than mid-caps, small-caps have performed well for the last three years.

Ideally, if you don’t understand finance, it’s better to go for multi-cap funds. Keep in mind, that funds which focus on small and mid caps should not be the core of your portfolio . Large-cap funds should be the core of your portfolio, as such funds provide stability, especially in the long term.

If you select the right equity MF, that could even give you better return than the benchmark indices. In short, when you hold equity MFs for long term, you invest in the best tool to keep your investment away from the reach of the inflation monster, as well from worrying of daily volatility.

Updated Date: Dec 16, 2016 16:57:23 IST