How long should you hold your mutual funds?
The time horizon is an important factor in any mutual fund investment. The intervals of time over which investments are kept until they are required are referred to as time horizons. The time horizon for an investment can be either short or long, depending on the objectives. The point in time at which you first start investing can also have a significant impact on the length of your time horizon. When looking at something over a longer period, the power of compounding has more time to work its magic, while short-term goals are often met through short tenures. Let us take a deeper look at long and short-term investments in mutual funds and see the benefits of each,
What is a long-term investment?
Long-term investment refers to mutual funds investment with a time horizon of over five years. Investing for the long term provides various benefits that investors who attempt to time the market or day-trade in the short run cannot. Below are some advantages of long-term investing.
- Long-term investments are expected to result in significant wealth accumulation over time. Numerous people who lack the knowledge necessary to engage in derivative markets rely on long-term investment returns to plan their financial futures. It may include dividends from stock ownership and interest on fixed deposits.
- Most investment costs, excluding the risk component, consist of commissions and capital gains taxes. Long-term investors are charged transaction fees less frequently, if not at a reduced rate. Many investors can defer capital gains taxes while allowing returns to accumulate in their bank accounts. Short-term profits are taxed at a lower rate than long-term profits in mutual funds.
- When investing for the long term, investors do not need to monitor the markets daily to look for minute changes in price. This frees up a lot of time for investors.
What is a short-term investment?
Easy access to liquid funds is a key feature of short-term investing options. These investment terms can last anywhere from one day to five years. These assets are both safe and easily exchanged for cash. The investors who would benefit most from them are those with a limited grasp of risk and who seek stable profits. We have discussed in depth the top choices for short-term investments.
Debt funds are a suitable example of short-term mutual fund investment. Mutual funds that invest primarily in debt securities, such as government bonds, corporate bonds, or money market instruments, are known as debt mutual funds. Debt funds are widely regarded as one of the most secure mutual fund categories. As a result, they are perfect for those who prefer to minimize their financial exposure to risk while yet generating high returns in a concise time frame. In addition, debt funds are quite stable in the face of economic and stock market volatility.
Below are the advantages of investing in debt funds
- You can earn both interest and potential capital gains from debt by investing in a debt fund. That’s because it opens up the formerly off-limits money and wholesale debt markets to small and medium-sized investors.
- As debt funds are far less risky than equity funds, a deliberate allocation to the top-performing debt funds reduces risk and provides portfolio stability. Strategic investments in debt funds are advantageous for capitalizing on temporary yield opportunities.
Two factors that affect your decision here are your goals and risk appetite. For instance, if your goal is to create a large corpus, you may need to invest long-term. Ensure you invest in the two factors for the best results.