Mutual funds are one of the best investment instruments that can help you build a corpus for your long-term financial goals. You can either invest lump sums in mutual funds or start a Systematic Investment Plan (SIP). If you’re looking to invest for the long term, it’s better to opt for the SIP route, as it allows you to invest fixed amounts at fixed intervals.
Benefits of staying invested for a long term
As you know, mutual fund investments are subjected to market risks. It means that the value of your investment may fluctuate sharply during volatile markets. During such times, it’s common to feel the urge to exit your investments. However, financial experts recommend that you should stick to your investment timeline irrespective of the market volatility.
Staying invested for the long term can help you gain maximum returns on your investment and fulfill your financial goals easily. Below are the reasons to stay invested in mutual funds for the long term:
- Helps you achieve long-term financial goals
It is no secret that by opting for a longer investment horizon, you can create a large corpus. It can help you meet your long-term financial goals, such as retirement planning, buying a house, a child’s wedding, etc. Instead of investing a big lump sum at once, you can break your investments into smaller SIPs spread over a long period of, say, 15 to 20 years.
For example, if you start a SIP of Rs. 10,000 in a mutual fund offering 12% annualized returns, you would accumulate approximately Rs. 1 crore after 20 years.
- Minimizes the effect of short-term market volatility
Market volatility can affect the Net Asset Value (NAV) of a mutual fund, and hence, your overall investment value may also get affected. Equity mutual funds are highly affected by short-term market volatility due to the fluctuations in stock prices in which the fund manager has invested your money.
However, if you choose to stay invested for a long period, these fluctuations smoothen out to keep your portfolio green.
- Higher tax benefits
Returns from mutual fund investments are taxed according to the duration for which they are held. In the case of equity mutual funds, if you hold your investments for less than a year, the returns from them are taxed as per the short-term capital gains (STCG) taxation rules.
On the other hand, if you hold your equity mutual funds for a longer period, the returns are taxed as per the long-term capital gains (LTCG) taxation rules. And as per the Income Tax Act of 1961, LTCG gains are taxed at relatively lower rates as compared to STCG.
You can gain several benefits if you start investing in mutual funds from an early age. It will allow you to make inflation-beating returns and accumulate a large corpus by staying invested for a long period. What you can do is start with smaller SIPs and then gradually increase them as you grow old and start earning more.
To get more investment insights and to invest in mutual funds online, download the Tata Capital Moneyfy app on your smartphone.