People who try to make quick money are often seen repenting because they end up investing in a scheme that was beyond their risk appetite. Making quick money is almost impossible and most financial advisors will recommend investors to keep a long term investment horizon. You may not be able to create wealth in the short run, but in the long run chances of you building a decent corpus may increase. Also, long term investment might help investors accomplish their long term financial goals like retirement planning, buying their dream home, college education of their children or their marriage, etc.

To finance such long term goals, investors might need to have an investment horizon of 10 years or more. Investors must choose an investment scheme that may allow them to create wealth over the long term. But before deciding which mutual fund scheme to invest in, investors should first understand their risk appetite, their investment horizon, take into account their existing liabilities, look at their net income and then decide how much to invest. The definition of 'long term investment horizon’ may vary from person to person but do understand that the more years you have in hand, the better chance you have to earn long term capital appreciation.

What is a mutual fund?

A mutual fund is an investment product where the AMC pools funds from various investors sharing a common investment objective. Depending on the nature of the mutual fund scheme and its investment objective, the fund may invest across asset classes, money market instruments, currencies, and various sectors / industries to help the mutual fund outperform its underlying benchmark. A mutual fund focuses on achieving its investment objective either through active or passive management.

As there are many mutual fund investment products available, for someone new to the mutual fund universe, making an investment decision might become a tad confusing.

How to pick the right mutual fund scheme?

As mentioned earlier, an important thing that all investors are expected to do is to identify what their investment goals are. What is it that they want to achieve? Is it a retirement corpus or a marriage corpus for their children? Are they willing to invest by sacrificing a portion of their existing income for long term wealth creation? Identifying the right financial goal may help investors in narrowing down to a mutual fund scheme from the wide range of mutual fund products available.

The main investment objective of mutual funds like equity mutual funds is to generate capital appreciation over the long term. However, equity mutual funds are volatile and can even generate negative returns over the short term. Investors should first identify their risk appetite to determine whether they can handle the market fluctuations. It is important to not let human emotion get in the way of investment decisions as sometimes, investors end up selling their investments when they are underperforming fearing that they may incur further losses. This is precisely why most investors have a long term investment horizon when investing in market linked schemes like equity funds.

Once they have identified their ability to tolerate risk, the final task for investors is to identify their investment horizon. Long term can mean seven years, ten years, fifteen years, twenty years, or even more. While identifying their investment horizon, investors must look at the number of years they have in hand before they need the corpus. As mentioned earlier, a mutual fund scheme has a better chance to generate risk adjusted capital appreciation.

Which mutual fund schemes are ideal for the long term?

Equity mutual funds like large cap funds may be considered by investors for long term goals. At the same time, investors who wish to seek tax exemption may consider investing in Equity Linked Savings Scheme (ELSS) for long term investment as well. However, they should bear in mind that ELSS comes with a statutory lock-in of 3 years and they can liquidate their investments only after 3 years. On the other hand, large cap funds which predominantly invest in large cap stocks do not come with a lock-in period that allows investors to enter or exit the fund at their own will.

There is a common notion among investors that only equity funds can be considered for long term investment. However, what they aren’t aware of is that some debt funds like medium duration funds and long duration funds, too, can be considered for long term investment. These debt funds build their investment portfolio with underlying securities such that the average maturity period of the portfolio is seven to ten years. Investors who do not wish to expose their finances to volatile equity markets may consider adding these funds to their investment portfolio.

However, before making any investment decision retail investors are expected to seek expert advice.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.