Mutual funds are a popular investment option among many investors due to their potential for high returns, diversification, and professional fund management. They can be an ideal investment option for long-term financial goals such as retirement planning, children’s education, and wealth creation. In this article, we will explore the benefits of investing in mutual funds for long-term financial goals and provide tips on how to build your long-term investment strategy with mutual funds. We will also recommend the best mutual fund apps, that make mutual fund investments accessible, convenient, and flexible.
Short-term vs. long-term investments
Before we delve into the benefits of mutual fund investments for long-term financial goals, let us first understand the difference between short-term and long-term investments. Short-term investments are meant for a period of less than one year or typically up to three years, while long-term investments can span over five years or more. Short-term investments usually offer lower returns but are relatively low-risk investments. Examples of short-term investment instruments include fixed deposits, debt mutual funds, money market funds, and other liquid funds.
On the other hand, long-term investments are meant for a more extended period, sometimes up to ten years or more, and typically offer higher returns. Long-term investments help investors build wealth over time through the power of compounding. Examples of long-term investment options include stocks, equity mutual funds, real estate, and gold.
Benefits of investing in mutual funds for long-term financial goals
1. Professional fund management: Mutual funds are managed by professional fund managers who have a deep understanding of the financial markets and can make appropriate investments in various assets, such as stocks, bonds, or gold, depending on the fund’s objective. A professional fund manager’s expertise can help reduce investment-related stress and help generate returns that align with investors’ financial goals.
2. Diversification: Mutual funds are diversified investments that offer exposure to a range of assets, reducing the risk of significant losses. Diversification ensures that investors’ portfolios are not vulnerable to the performance of a single stock or industry.
3. Power of compounding: Investing in mutual funds on a long-term basis can help investors reap the benefits of compounding. The power of compounding is the process of generating increasing returns by reinvesting the earned interest and reinvesting the earnings for a more extended period.
4. High returns: Mutual funds have the potential to offer higher returns than fixed-interest investments or bonds, which are typically short-term investment options. Over the long term, mutual funds can deliver significant returns and help investors create wealth.
5. Low-expense ratio: Mutual funds usually charge an expense ratio, the cost of maintaining the fund portfolio and the fund management expenses. The expense ratio of mutual funds is generally less than the cost of actively managing a portfolio of individual stocks. The low expenses make mutual funds cost-effective and less burdensome on the investors’ wallets.
Making a long-term investment strategy with mutual funds
Here are some steps that investors could consider when building a long-term investment strategy with mutual funds:
1. Set your financial goals: Start by setting achievable financial goals that align with your vision and lifestyle. Examples of long-term goals include retirement planning, wealth creation, buying a house, and children’s higher education expenses. This step will serve as the foundation for your mutual fund investment plan.
2. Assess your risk appetite: Risk tolerance refers to the degree of risk that you’re willing to take for the potential of higher returns. Determine your risk appetite, keeping in mind factors such as your age, income, expenses, and life circumstances, to help you choose the right mutual funds.
3. Choose the right mutual funds: Select mutual funds that match your goals and risk appetite. Different funds cater to specific financial goals; for instance, equity mutual funds are suitable for long-term wealth creation, while debt and hybrid mutual funds serve the purpose of short-term financial goals.
4. Invest through SIPs: Systematic Investment Plans (SIPs) are one of the most convenient methods to invest in mutual funds for long-term financial goals. Automated investing through SIPs ensures discipline and can help minimize the risks of market volatility.
5. Regular review and rebalancing: It is recommended to review and rebalance your mutual fund investments periodically. This practice helps ensure that your investment aligns with your long-term financial goals.
Which mutual funds to invest in?
Choosing the right mutual fund is essential in achieving financial goals, and investors need to conduct proper research to select the right schemes. Here are some factors to consider when selecting the right mutual funds.
1. Fund manager: A fund managers plays a crucial role in the mutual fund’s performance. Check the fund manager’s qualification, experience, and track record in the industry before investing in mutual fund schemes.
2. Financial goals: Financial goals vary from person to person, and choosing the right mutual fund depends on one’s financial goals. Equity mutual funds are more suitable for long-term financial goals, while debt and hybrid mutual funds serve short-term financial goals.
3. Investment horizon: The investment horizon is the period for which the investor plans to stay invested in the mutual fund scheme. Investors looking for long-term financial goals should invest in mutual fund schemes with an investment horizon of at least five years.
4. Expense ratio: Expense Ratio is the expense charged by the mutual fund house for maintaining the fund portfolio. Check and compare the expense ratio of the mutual fund scheme with its peers before investing.
The best mutual fund apps in India
1. Bajaj Finserv App
The Bajaj Finserv App is a one-stop financial app that offers a seamless investment service experience. The app offers personalized investment recommendations to investors and provides a range of mutual funds, including debt, equity funds, and hybrid funds, to choose from.
With the app’s user-friendly interface and in-built financial tools, investors can track their investments’ performance, create, and manage goals, and analyze portfolio performance. The Bajaj Finserv App offers investors a smooth KYC process, instant investments, and paperless account opening for a hassle-free investment experience.
2. Groww
Groww is another popular mutual fund app in India, known for its low-cost offerings and accessibility. The app offers commission-free investing and allows investors to create a diversified portfolio based on their financial goals. The app also offers SIP options, tracking tools, portfolio analysis, and investment insights to help investors make informed decisions.
3. ET Money
ET Money offers investors a personalized investment experience, providing customized investment recommendations based on user profiles and other factors. The app offers commission-free investing, a broad range of mutual fund options, and automated investment tools such as SIP.
4. Paytm Money
Paytm Money is a popular mutual fund app that facilitates easy mutual fund investing, including offering commission-free investments, low expense ratios, and versatile investment options such as SIPs. With Paytm Money, investors can choose from a range of mutual fund schemes that cater to their financial goals and risk appetite.
Mutual funds for every life stage
To help investors make the most of mutual fund investments, we recommend the following mutual funds, based on life stages and financial goals:
For beginners: Bajaj Allianz Long Term Equity Fund, SBI Bluechip Fund.
For mid-career investors: HDFC Balanced Advantage Fund, Aditya Birla Sun Life Equity Advantage Fund.
For near retirement: ICICI Prudential Regular Savings Fund, DSP Balanced Fund.
Conclusion
Investing in mutual funds has numerous benefits for long-term financial goals, such as wealth creation, retirement planning, and education funds for children. When it comes to investing in mutual funds, it is essential to select mutual fund investments that align with your financial goals and risk appetite. The Bajaj Finserv App stands out as an excellent platform for mutual fund investments due to its personalized recommendations and seamless investment process. Choose wisely, invest early, and secure your financial future.