Investment Strategy for Long-Term Mutual Fund

Time and again, the power of compounding has shown incredible results to investors. The idea is to invest your money and let your money make money for you in the long run. However, it is not as easy as it seems.

A successful investment strategy for a long-term mutual fund requires a thorough understanding of the fund and market scenario. The ideal way is to study your risk and goals, and research the investment products for a long-term mutual fund investment strategy.

India is witnessing a rising trend of investment in mutual funds over the last few years. The mutual fund industry managed Rs 37.5 lakh crore worth of investor assets by end of 2021-22 and individual investors held Rs 17.27 lakh crore in mutual funds which is 33.84% over March 2020.

What Does Long-term mean and why Is It preferred?

There is no fixed way to define ‘long-term’. If you are in your 30s and planning for your retirement, then the long term would be 30 years. The definition of the long term will vary based on your individual goals. Many investors consider a period of 3 to 5 years or more as long term.

Long-term investments help you secure funds for the future. You can also start small and then build a sizable corpus as a long-term investment will give you enough time for your assets to appreciate. Let’s understand this with the help of an example:

Read MoreWhat is Lot Size in Options Trading?

Suppose there is a mutual fund that has shown a 10-year historical return of 12%. If you would have invested Rs 10,000 in this mutual fund 10 years ago, your investment would be worth Rs 22,000 which is more than double. Past performance is not an indicator of the future, but the research shows that long-term investment is good.

9 Tips for Creating a Long-Term Portfolio

1. Define Your Long-Term First

There are various types of long-term investments. The first step is to define what is long-term for you and suits your goals. You go for multiple long-term portfolios with different objectives. For example, if you are planning to retire in the next 10 years, you can plan a 10-year portfolio for retirement.

Also, if your child is 15 years old and you plan to send him abroad for higher studies, then you can create a separate portfolio for the same. If you are clear about your long-term goal, it will be easier to plan a portfolio around it.

2. Detailed Research on Available Investment Options

Carry out detailed research on available investment options and their returns. Equity funds have a higher risk-reward ratio than debt funds. However, under the broad categories, there are at least 8-10 different funds of varying nature.

For example, a large-cap fund is less risky than a small-cap fund within equity mutual funds. Also, credit risk funds are riskier than most debt fund categories. Therefore, carrying out detailed research will help you pick the best investment option based on your risk appetite.

3. Study the Track Record of Mutual Fund Scheme

The historical performance of a mutual fund doesn’t guarantee its bright future. However, you need to keep a track of its past performance and check how the fund manager invests. This will also help you study the market cycle, market trends, and the specific investment cycle of the fund manager. Therefore, you will be able to make a wise decision in the longer run.

4. Check the Entry Load, Exit Load, and Taxation

Before you decide to invest in a particular mutual fund, it is essential to find out whether the fund is tax-free and to what degree. This will impact how much money you will make. Entry and Exit loads refer to the costs you have to bear when you enter the fund and when you sell off your units respectively.

As an investor, you are expected to be aware of these charges. They will affect your final return and will help you decide whether you wish to stay invested in the long run.

5. Evaluate Your Risk Levels

As an investor, it is essential to evaluate your risk levels and consider personal risk tolerance. Are you okay with dramatic swings in portfolio value? Or, is a more conservative type of investment suitable for you?

You should understand that risk and return are directly proportional parameters. Therefore, you must balance your desire for returns against your risk-taking ability.

6. Create a Long term Investment Strategy

Once you have clarity on your risk profile and long-term goals, you can decide how much money you wish to invest in each type of mutual fund. Your long-term goal can be saving enough money for your child’s education, marriage, buying a dream house, your retirement, or planning a world tour.

Suppose your long-term goal is funding your child’s higher education in a foreign country, the portfolio can change as and when your child reaches the appropriate age for higher education, depending on the change in your risk level.

7. Diversify Your Investment

It is a golden rule to diversify your investment for balanced returns. Different types of mutual funds have varying risk thresholds and perform differently at different periods. Therefore, you should invest in the same or different mutual fund schemes depending on your risk tolerance, expertise, risk-reward ratio, and diversification plan.

Diversification will help you get the best of your assets. Even if you feel that you are capable of taking 100% risk for higher returns, it can land you in trouble in the future. Create a diversified portfolio to help maximize returns over a longer time frame.

8. Opt for SIP As the Investment Route

Another important factor for a long-term win in the mutual funds is to opt for a SIP or Systematic Investment Plan. It will help you make a disciplined and regular investment. When the market goes down, you can buy more units for the same price.

This, in turn, will help in Rupee Cost Averaging and the lower the cost of your investment. SIP helps you pick your time horizon and you get the option to top up your investments when the market is correcting or vice versa.

9. Monitor the Performance of Mutual Fund Regularly

Routine monitoring of mutual fund investment will help you track its performance in different market conditions. Compare the performance of the fund with its peers and analyze the factors that need attention.

This will help you make wise decisions and get involved in goal-based mutual fund investing. You will also be able to identify top-performing funds in India.

Key Takeaways

  • If you are planning a long-term investment, mutual funds are time-tested options for you.
  • They help you create the required corpus for your future needs. You can create different long-term portfolios for different long-term objectives.
  • You should check the taxation, and entry and exit load of mutual funds as they impact your final returns.
  • You can also study the track record of the fund as past performance can help you assess the fund’s volatility over time.
  • Different types of mutual funds offer different risk-reward profiles. You should assess your risk profile and allocate your funds accordingly.
  • You must diversify your investment to safeguard yourself from potential losses in the future.
  • You should opt for a SIP and monitor the performance of your mutual fund regularly.