Best Mutual Funds for Long Term Investment
Investing in a mutual fund for a long-term requires patience and dedication. Usually, any investment option that lasts for more than five years comes under long term investment. In the context of mutual funds, equity funds are one of the most common types of long-term mutual fund schemes.
Equity mutual funds are volatile in nature and one may encounter financial losses if he/she invests in them for a short duration. However, as time passes, these mutual funds become more stable and have the potential to provide significant returns to their investors. This detailed guide will help our readers know the best mutual funds for long term investment and several aspects of such funds.
List of Best Long Term Mutual Funds
Here are some of the top performing mutual funds over a long investment horizon:
|Name of the Fund||5-Year Annualised Returns*|
|Quant Tax Plan – Direct Plan – Growth||23.39%|
|Quant Active Fund – Direct Plan – Growth||22.99%|
|Quant Mid Cap Fund – Direct Plan – Growth||21.96%|
|PGIM India Midcap Opportunities Fund – Direct Plan – Growth||21.29%|
|Kotak Small Cap Fund – Direct Plan – Growth||19.16%|
|Nippon India Small Cap Fund – Direct Plan – Growth||19.22%|
|Kotak Emerging Equity Fund – Direct Plan – Growth||17.01%|
|Mirae Asset Tax Saver Fund – Direct Plan – Growth||16.56%|
|ICICI Prudential Small Cap Fund – Direct Plan – Growth||16.63%|
|Mirae Asset Emerging Bluechip Fund – Direct Plan – Growth||16.31%|
These are some of the top performing mutual funds offering significant returns in the long term.
What Are Long Term Mutual Funds?
Any mutual fund with an investment timeline of more than five years comes under long term mutual funds. These are different from mutual funds that focus on gaining short-term returns.
A long term investment aims for significant wealth creation to help investors achieve their future long-term goals. These goals generally include building a corpus for a child’s education, buying a house, planning life after retirement, etc. So investing in mutual funds for the long term, can help you achieve these future financial objectives.
How Long Term Mutual Funds Generate Returns?
Once several investors put their money in a particular mutual fund scheme of an asset management company, the fund manager invests this corpus in various instruments as per the fund’s investment strategy.
Staying invested in mutual funds for the long term has the potential to generate significant returns. This is because investors get an opportunity to benefit from the power of compounding. Compounded interest is the interest amount you receive on the basic principal that you invested, plus the interest amount that gets added to it over the years.
The returns of equity mutual funds are subject to fluctuations in stock markets in every trading session. There may be fluctuations in the price of shares of these companies in the short term due to various factors like demand and supply, corporate governance issues, government policies, external economic environment, etc. This may not provide any meaningful capital appreciation for investors in the short-term.
However, as time progresses, these companies grow and gain stability. As a result of this stable growth and earnings over the long term, they pass on the benefits to investors.
There is no rigid rule that one has to stay invested in equity funds for the long term. You can withdraw from these schemes within a short span of time. However, it is imperative that you invest in these funds with a long-term horizon in mind so as to achieve meaningful capital appreciation.
Who Should Invest in Long Term Mutual Funds?
Investors are advised to go for long duration mutual fund after assessing the following parameters:
- Patience to sit through short-term fluctuations: For long term investment schemes one needs to understand the risk of investing for the long term. If you are someone who worries about short term market fluctuations or short term losses you should stay away from these investments.
- People who wish to start investing in the equity market: If you are someone who is not familiar with the intricacies of day-to-day market fluctuations, but wish to start investing in the equity markets, you can consider investing in a mutual fund for the long term. As mutual funds are handled by experienced fund managers, you won’t be required to observe the daily changes in the unit price as your primary goal is long term capital appreciation.
Advantages of Investing in Long Term Mutual Funds
Here are some advantages of investing in mutual funds for a long term:
- Higher Returns
Long term mutual funds come with an additional benefit of compounding. If you have an investment horizon of 5, 10 or 30 years, your growth will be boosted due to compounding.
- Lower Risk
Investing for the long term provides greater stability as compared to the short term. Markets are volatile in the short term and returns are often erratic. However, in the long term, investors understand the market better and have the potential to realise higher returns.
- To Financially Secure your Future
Investing in long term mutual funds clearly means that an investor wants to achieve some long term goals like to accumulate corpus for post-retirement life, children’s education, etc. These goals can be achieved in five, 10, or sometimes even 30 years. Having an understanding of the future goals, gives financial stability and enables one to lead a financially secure life.
Things to Consider Before Investing in Long Term Mutual Funds
You should keep the following factors in mind before making an investment in Long Term Mutual Funds:
- Do your research:
Doing in-depth research about a mutual fund and its underlying assets is crucial before going ahead with any investment decision. You should evaluate the past performance of a mutual fund, the investment strategy of the fund manager, objectives of the fund, etc., before investing for the long term. However, a fund’s past performance does not guarantee future returns.
- Decide on an Investment Strategy:
Before making a long term investment, it is important to assess your investment strategy. Moreover, sticking to your strategy and modifying it as per the market fluctuations is equally important. Increasing your SIP amounts frequently will help to build a rich corpus based on the power of compounding.
- Make informed decisions:
Being patient with your investments will help you reap substantial benefits in the long term. Investing regularly, whether you choose the SIP or lump-sum method, will help you accumulate wealth steadily. Panic selling or not keeping a close eye on mutual fund returns may prevent you from achieving your financial goals.
- Check the Expense Ratio
It is a cost levied on different mutual fund schemes by Asset Management Companies (AMCs) to cover their cost of operation. As long as you stay invested in a mutual fund, the expenses will get automatically deducted as a percentage of your investment value. As long term investments require you to stay invested for five to seven years, you might have to pay a high amount towards expense ratio.
Taxation of Long Term Funds
Gains and proceeds received from the sale of units of mutual funds are subject to taxation under the head capital gains. .
If you stay invested in an equity fund for one year or more, the gains are considered as Long Term Capital Gains (LTCG). The rate of tax on LTCG is 10% without indexation benefit.
However, in case of LTCG taxation system for equity funds, all gains of up to Rs. 1 lakh are exempt from any kind of taxation.
Long term mutual funds offer a chance to generate a substantial amount of wealth over the long term. Although mutual funds are inherently risky, the long time period of investment acts as a cushion and mitigates risk in the portfolio. Make sure to assess your financial goals before selecting the best mutual funds for long term investment.
FAQs about Long term mutual funds
Do long term mutual funds come with a lock-in period?
Only Equity Linked Savings Schemes (ELSS), which are equity class mutual funds, come with a lock-in period of three years. Apart from this, no mutual fund has a mandatory lock-in period.
What are the ways of investing in long term mutual funds?
You can invest in long term funds via two methods – SIP and lump sum method. The SIP method involves making regular investments in the mutual fund scheme and purchasing corresponding mutual fund units. At the same time, the lump sum method involves investing a bulk amount upfront and purchasing units in one go.
What is an expense ratio?
An expense ratio is a charge levied on all mutual fund investors. Asset Management Companies or AMCs use it to cover their operating expenses like manager’s fees, infrastructure expenses, distribution costs, etc.
Do long term funds come with an exit load?
Yes, almost all mutual funds come with an exit load. An exit load is a charge that mutual fund houses levy on their investors for exiting a scheme within a specific period from the date of investment.