A mutual fund is a pool of money managed by a professional fund manager of an Asset Management Company (AMC). The fund manager invests in various assets like stock, bonds, and money market instruments and distributes profits proportionately among investors.
A significant benefit of mutual funds is that it allows small investors to access a diversified portfolio of many securities managed by an investment expert. In India, many mutual funds offer different choices for various financial goals. So, if you have a long-term investment goal, you can accomplish it by investing in mutual funds.
Read along to know about the best mutual funds for long-term investment.
Which Mutual Funds have given the best performance in the Long Term?
The following is a list of the long term mutual funds that have given the best performance based on their 5-year annualized returns:
| Mutual Fund Scheme | Type of Mutual Fund | 5-Year Annualised Returns |
| Tata Digital India Fund- Direct Plan-Growth | Sectoral/thematic | 28.81% |
| Aditya Birla Sun Life Digital India Fund- Direct Plan-Growth | Sectoral/thematic | 26.97% |
| ICICI Prudential Technology Fund- Direct Plan-Growth | Sectoral/thematic | 27.93% |
| SBI Technology Opportunities Fund- Direct Plan-Growth | Sectoral/thematic | 25.78% |
| Quant Tax Plan- Direct Plan-Growth | ELSS | 23.67% |
| Quant Small Cap Fund- Direct Plan-Growth | Small-cap fund | 22.72% |
| Axis Small Cap Fund- Direct Plan-Growth | Small-cap fund | 14.9% |
| Parag Parikh Flex Cap Fund- Direct Plan-Growth | Flexi cap fund | 11.8% |
| PGIM India Midcap Opportunities Fund- Direct Plan-Growth | Mid-cap fund | 13.2% |
| Nippon India Small Cap Fund- Direct Plan-Growth | Small-cap fund | 14.9% |
*Data as of Sep 07, 2022
Differences between Short Term and Long Term Mutual Funds
The following is a list of differences between short term and long term mutual funds:
| Parameters | Short Term Mutual Funds | Long Term Mutual Funds |
| Meaning | Short-term funds are debt funds that invest in fixed-income instruments of high-quality companies. | Long-term funds have excellent potential to deliver high returns. It also includes debt funds with long maturity periods and equity funds. |
| Investment duration | These mutual funds usually have an investment horizon from a few days to 3 years. | The investment horizon is usually 5 years or more. |
| Types of Funds Included | Short duration funds, ultra-short duration funds, and liquid funds | Equity funds like ELSS, small-cap funds, mid-cap funds, large-cap funds, multi-cap funds, etc.
Debt funds like long-duration funds, gilt funds, and dynamic bond funds. |
| Returns | These can offer higher returns than bank deposits | Long term funds have the potential to offer higher returns |
| Risks | These are subject to interest rate risk, credit risk, etc. The risk compared to long-term funds is low. | Long-term funds are subject to market risks apart from credit risk, interest rate risk, etc. Higher risk compared to short term funds |
| Volatility | Lower than long term investments | Higher than short term investments |
| Investment goals | These are suitable for short-term goals like going on a vacation, purchasing a car, etc. | These are ideal for long-term goals like buying a home, building a retirement corpus, etc. |
What Does Investing in Long-Term Mutual Funds Mean?
Long-term mutual funds allow you to create wealth over some time to reach your life’s goals. Long-term goals include ones with an investment horizon of 10 years or more. This includes buying a house, building a corpus for children’s education and marriage, etc.
When you invest in mutual funds, your investments are subject to market risks. The prices of underlying securities will rise and fall depending on market conditions, which are unpredictable and beyond the control of a fund manager. If you look at long-term trends, the markets have permanently and historically moved upwards.
When you stay invested for a long time, you benefit from the overall uptrend in the market. Thus, long-term investments in mutual funds help you accumulate wealth while mitigating the risks of market volatility. However, you will need to be patient and not panic whenever there is an unfavorable price movement.
Long-term investment suits those who are willing to take some risks for high potential returns. Equity investments are often best suited for the above needs but are subject to short-term fluctuations. You will need to stick with your assets to see your money grow.
Why Would You Want to Invest in Long-Term Mutual Funds?
The following is a list of benefits of investing in long term mutual funds:
- The benefits of compounding: Compounding is one of the most significant benefits of long-term investments. It involves getting profits on your initial investment plus returns, which keep growing over time. If you start investing early, this benefit lets you get a significant amount of money.
- Mitigates risk: For equity investments, having a long-term horizon leads to much fewer risks. Unpredictable fluctuations can wipe out your gains in little time with short-term investments. However, the stock prices are bound to grow when you invest long-term. Moreover, you get enough time to rebalance your portfolio.
- Decreases the cost of investments: Long-term funds carry fewer costs than short-term funds. Short-term investment involves more transactions and has more brokerage and compliance costs. Sometimes, these expenses can be so high that they might neutralize investment gains.
- Peace of mind: Volatility is a significant concern in short-term investments in the equity markets. Sometimes, these fluctuations cause even experienced traders to make bad calls and wrong choices. There is no need to worry about such problems with long-term investments.
- Helps you learn from mistakes: A long-term investment horizon gives you time to recoup any losses. You can use the time to learn from your mistakes and rectify bad investment decisions.
Let’s Talk about Choosing Long Term Mutual Funds
Here are some of the things you will want to consider when you invest in mutual funds for the long term:
- The right type of fund
Equity funds are among the best MFs to invest in for the long term. Although they are volatile in the short term, they have high potential growth that helps you grow your wealth. You should check your investment objective and risk profile to find out the right category of fund.
- Expense ratio
The expense ratio is the fee that an AMC (Asset Management Company) charges for managing the investors’ portfolio. This fee impacts a fund’s returns as it is levied on an annual basis. Therefore, you will want to choose a fund with a lower expense ratio to get more returns.
- The fund manager’s expertise
You should check the fund manager’s track record, especially if you are considering an actively managed long-term fund. Check the funds he/she has managed and if these schemes have consistently delivered good returns and outperformed their peers.
- Diversification
A well-diversified equity fund is very likely to generate steady returns in the long run. It is a good idea to not put all your eggs in one basket but rather invest in two or more different mutual funds. This will mitigate portfolio risk and maximize portfolio returns.
- Risk assessment
You will want to pick funds with a risk level that you are comfortable with. It is also a good idea to look for funds with high risk-adjusted returns.
Final Word
If you have long-term investment goals, there are several mutual funds that you can invest in to achieve them. However, you need to be willing to stay invested and bear some short-term volatility. Many experts consider equity-oriented funds to be the best option for high returns over a long time.
Frequently Asked Questions
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What are the best types of equity funds for long-term investments?
The following are some of the equity-oriented schemes for long term investments:
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- Aggressive hybrid funds: These equity-oriented funds are ideal for conservative investors trying to create long-term wealth.
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- Large-cap funds: These invest in the top 100 stocks in terms of market capitalization and are the most stable among equity funds.
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- Mid-cap and small-cap funds: These funds invest at least 35% of investment corpus in large-cap stocks and a minimum of 35% in mid-cap stocks.
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Are SIPs a good idea for long-term investments?
Yes, Systematic Investment Plans (SIPs) are a popular option for long-term investors. SIPs involve investing a fixed amount at regular intervals on a specific date decided by the investor.
SIPs are an excellent method to create a large corpus with small and regular investments. When you invest via SIPs for a long time, the benefits of compounding and rupee cost averaging further increases your gains.
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How are long-term mutual funds taxed in India?
Capital gains from mutual funds are taxed based on the holding period. For equity funds, Long Term Capital Gains (LTCG) are taxed at a 10% rate. This tax is applicable only on LTCG above Rs. 1 lakh in a financial year.
For debt funds, LTCG tax is applicable at 20% with the indexation benefit if you hold the units for over 36 months. Hybrid funds are taxed as equity funds or debt funds based on their equity exposure.
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Should I be worried about market volatility when investing in mutual funds?
No, you should not worry about the daily NAV (Net Asset Value). Every economy and market goes through periods of growth and recession. The impacts of such ups and downs are only relevant in the short term.
When you stay invested for a long period, only the long-term compounded total returns will matter.
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How do mutual funds help reduce portfolio risk?
When you own shares of a company, the stock price may drop significantly due to market risk, price risk, or company-specific risks. The risks get mitigated as mutual funds invest in many securities, often across different sectors or market capitalization. If one or few securities take a dip, it will not affect the rest of your investments.
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