Mutual funds have become a favoured investment tool for new and expert investors alike. It offers various benefits such as diversification, professional management, higher returns and flexibility of investing.
Compared to other conventional forms of investment, mutual funds can be a better value proposition for building wealth over the long run. Even though there are different types of mutual funds, every category has a different investment objective, which can be used to meet individual financial goals.
This article sheds light on what is equity fund and how to gauge the ideal time horizon to invest in equity funds.
What is an equity fund?
Equity funds invest primarily in stocks of large companies. They are considered as highly volatile, i.e., sensitive to market fluctuations. But, to commensurate with the high risk, they are also known to offer higher returns compared to other mutual fund types. These funds are best-suited for investors with high-risk appetite. Such aggressive investors have surplus funds to invest in mutual funds that they can afford to lose.
Ideal time horizon to invest in equity mutual funds
As equity funds carry a high risk, mutual fund experts suggest investing in them for more extended periods to weather market volatility. Long-term horizons mean seven to ten years or more. Systematic Investment Plans (SIPs) can be an ideal way to invest in mutual funds. They allow you to enter the market at different phases. This helps average the purchase cost of units in the long run and can earn you higher returns.
Let us understand this with the help of an example.
Suppose, you purchased 500 units of a fund at a Net Asset Value (NAV) of Rs.20 per unit with a monthly SIP of Rs.10,000.
After a year, the NAV falls to Rs.16. You automatically end up buying more units, i.e., 625 (10,000/16).
Thus, you gain more by investing via SIPs in equity funds and staying invested for a longer tenure.
Investing in debt funds for three-year goals
Debt funds invest in fixed-income bearing instruments and are relatively regarded as more stable than equity funds. They are well-suited for investors seeking steady returns over a short-term period.
When you invest for a short-term horizon, the main goal should be to avoid exposing your investments to unwanted volatility and risks. Since debt funds invest in safe options such as government securities, corporate bonds, certificate of deposit, treasury bills, etc. they can help you earn decent returns with minimal risks. For short term investment horizons of less than five years, debt funds can be an ideal choice.
Conclusion
If you are looking to invest in mutual funds online, it is advisable to understand the different types of mutual funds available. Consider equity funds if you have a long-term horizon of seven to ten years or more. For short term horizons, relatively less risky options such as debt funds can be an ideal mutual fund investment option.
