It is no surprise that a lot of investors are turning to mutual funds these days. Mutual funds are managed by expert fund managers, cover a wide range of securities, and help you benefit from compounding. But a common question that most investors ask is, how long they should keep their money invested in mutual funds.
Now, this is not a simple question to answer. The duration of your investment depends on several factors – these include your end objective, the corpus you want to build, your risk appetite, and the amount of money you are looking to invest.
Let’s try to answer the question methodically.
The Impact of Your Investment Tenure
Mutual funds invest in equities, debt instruments, and other kinds of securities. While debt instruments are less affected by market volatility, equity investments are impacted by the ups and downs caused by micro and macroeconomic factors.
Investing for a shorter duration in equity mutual funds is likely to impact your returns very differently from staying invested for a longer period. Extended periods of staying invested enables your investment to adjust to volatility and gives you the benefit of compounding.
Following are the :
1. Equity Mutual Funds
Equity funds usually buy stocks. These funds are riskier, but they usually make more money.
Suggested time to keep: Five to seven years
Over a shorter duration, the markets are likely to be unpredictable. But staying invested for a longer tenure is likely to help you cover for volatility.
2. Debt Mutual Funds
Debt funds invest in fixed-income securities such as government bonds and corporate bonds. These funds are seen to be more stable than those that invest in stocks. While more predictable, debt funds aim to preserve capital and but are likely to offer lower returns than equity mutual funds.
Suggested time to hold: One to three years
These funds are good for short- to medium-term financial goals if safety and steady returns are important.
3. Hybrid Mutual Funds
Hybrid funds put money into both stocks and bonds. They aim for safety while offering the potential to grow your investment.
Suggested time to hold: Three to five years
The debt part stays the same, but the equity part can get bigger over time.
Check that the time frame for your investment fits with what you want to do.
Align Your Investment Duration with Your Goals
Here are a few examples of aligning your tenure with your investment goals:
What you want to do in the next one to three years
Vacations, emergencies, or new gadgets. You may consider debt funds.
Plans for the next three to five years
Getting a car, starting a small business, or fixing up your home. Hybrid funds may be a good option.
Goals that will take longer than five years to reach
Retirement plans, buying a house, or paying for your children’s education. Equity funds may be a better fit.
Note: Avoid frequent trading. A lot of people who try to time the market buy and sell a lot. Doing things this way might not make as much money.
Frequent withdrawals may also mean you end up bearing:
Costs of leaving (Exit Load)
Taxes (Short-Term Capital Gains if you withdraw within 1 year of investing)
Notional loss of withdrawing before compounding sets in
The Power of Long-Term Investing
There are a lot of good reasons to save money for a long time:
More likely to adjust to market volatility
The power of compounding
In Conclusion
There is no one right answer to the question of how long you should keep your money in mutual funds. The ideal length of time depends on the kind of fund and what you want to do with your money.
You can achieve your financial targets while accumulating wealth through mutual fund investments, which you should maintain until you reach your specified investment duration.
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.