Which mutual fund is better for long term investment?
If you are someone who isn’t happy with their current investments and are looking for an investment scheme that might help you improve your existing financial condition, then you can consider investing in mutual funds. Mutual funds are an investment vehicle for pooling funds and investing them collectively to help the investors earn capital appreciation over the long term. A mutual fund might invest in asset classes like real estate, debt, equity, gold etc. Apart from this, it might also invest in money market instruments like commercial papers, call money, debentures, G-sec, company fixed deposits, etc. A mutual fund is a professionally managed fund where the fund manager buys / sells securities through an applied investment strategy to help the scheme outperform its underlying benchmark.
Types of mutual funds
Mutual funds can be largely categorized as equity and debt. Debt funds are generally preferred by those with a short term investment horizon. Equity funds can be further categorized as ELSS, large cap, small cap, mid cap, multicap and hybrid schemes.
A large cap fund invests in stocks of companies with large market capitalization. They are also referred to as bluechip funds by come. A small cap fund is considered to a high risk investment as it invests in stocks of small cap companies or companies that are new and struggling. A mid cap fund invests in mid cap stocks. A multicap scheme follows a unique investment strategy where it invests in stocks of companies with small, mid and large market cap for income generation.
A hybrid fund has gained momentum in the recent past for its unique asset allocation strategy. While a debt fund invests in money market instruments and equity funds invests in equity, a hybrid funds invests both in equity and debt asset classes for income generation.
ELSS or Equity Linked Savings Scheme is an open ended tax saving mutual fund scheme that comes with a three year lock in and tax benefit. The three year lock-in is probably the shortest among other tax saving instruments like PPF and bank FDs. ELSS is the only mutual fund scheme whose investments are eligible for tax deductions.
Which fund is ideal for long term investment?
Every mutual fund has a different investment objective, risk profile, asset allocation strategy etc. Market regulator SEBI has further categorized mutual funds for investors to be able to take an informed investment decision. Hence it is essential for every investor to first start financial planning and then depending on their financial goals decide which mutual fund scheme to invest in for the long run. If you do not want to take much risk with your money and are alright with low but consistent returns, then you can consider investing in bluechip funds. Bluechip funds invest in well established companies These companies are already at their peak and hence there isn’t much scope for them to go any higher. Hence, investing in such company stocks will generate stable returns. At the same time, small cap scheme holds the potential to generate higher returns because these are companies that are hungry for growth and success. As much as there is a fear of a start up failing, there’s a high amount of risk rewards involved. However, small cap schemes are highly volatile in nature and hence investors should consult a financial advisor before investing.
If your aim is to save tax and earn capital appreciation at the same time, then you can consider investing in ELSS. Since ELSS comes with a lock-in period you can consider starting a SIP to invest for 36 months straight without having to feel burned.
Mutual fund investments do not guarantee returns hence it is better to keep a diversified investment portfolio.
