Investment in mutual funds (MF) requires a certain duration of time to give efficient returns to the investors. Mutual fund investments work best in the long term. A time period of 5 years or more is considered long term. But the most important thing is asset allocation when it comes to investment. All investments – short term or long term, should follow an asset allocation strategy. “This strategy needs to be fine-tuned according to macro conditions and can be tweaked when the macro conditions change,” says Renu Maheshwari, SEBI registered investment advisor, CEO and principal advisor at Finzscholarz Wealth Managers LLP.
What is asset allocation?
Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, gold, real estates and cash. The process of determining which mix of assets to hold in your portfolio is a very personal one.
According to experts, the best place to invest in the long term is equity. And, if the investments are being made through mutual funds, they should be done in equity mutual funds.
Usually, first-time investors think that they can decide on the funds to put in their savings my merely seeing the star ratings of the funds. But mere fund’s rating will not help you in your search for the right mutual fund. A fund’s rating, by itself, does not tell you whether it is a good or bad option. Investors need a better parameter to help them in their decision making.
“Most DIY investors feel that star rating is a sure-shot way of picking the market winner. Reality is not so simple. Star ratings are based on the past whereas investments are done for the future, “says Renu Maheshwari.
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She added that the choice of schemes will depend on the following factors:
• If the investment is from monthly savings or lumpsum money.
• Is it just one scheme or there are sufficient funds to create a portfolio of schemes.
• Market level and macro conditions.
• Investors’ risk profile, age, and stage of life
• Is the investor with an adviser or is he a DIY client.
• If the investor is a DIY investor, can he /she do a periodical rebalancing by himself/herself.
Where should one invest in the long term?
As per Renu Maheshwari, index funds can offer the simplest form an investor can go for. A long-term SIP in Sensex or NIFTY 50 of any reputed AMC will earn excellent returns over the long term. When the portfolio gets bigger mid-cap and small-cap indices can also be added to the portfolio. For an investor with a lower risk profile, an asset allocator fund can be a good option.
As the rate of returns is likely to change and remain volatile in the short term, long term investments prove to be comparatively less volatile and hold the potential to give higher returns. The absolute stability associated with long term investments makes it ideal for investors with long term goals.