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9Mutual Funds: Why Long Run Matters?Jan-21-2020

Mutual Funds: Why Long Run Matters?

Blog by – Mr. Dhruv Ajmera
Mutual funds have been a great avenue for retail investors to park their savings into financial markets. Investing in mutual funds for long term has been a common and effective financial strategy. The mutual funds are of different types. For investors who have a high risk appetite, it advisable to invest in equity mutual funds which typically tend to provide with the highest amount of returns in medium to long term though these investments are exposed to short term fluctuations in share markets. For investors with a low risk appetite, investment in debt mutual funds is a good idea which generally offers better returns than bank fixed deposits. Mutual funds in India give individual investors access to professionally managed portfolios of equities, bonds and other securities. Mutual fund investments put your funds in number of securities, and performance is usually tracked as the change in the total market cap of the fund—derived by the aggregating performance of the underlying investments.

Assets managed by the Indian mutual fund industry have grown from Rs. 23.59 lakh crore in November 2018 to Rs. 26.94 lakh crore in November 2019, recording a 14.21% growth in assets over November 2018. The proportionate share of equity-oriented schemes is now 42.5% of the industry assets in November 2019, up from 42.1% in November 2018. The proportionate share of debt-oriented schemes is 28.4% of industry assets in November 2019, down from 29.6% in November 2018.Individual investors now hold a lower share of industry assets, i.e. 53.7% in November 2019, compared with 54.0% in November 2018.

While buying a mutual fund or starting a SIP in a fund is a mere start of investing process, staying invested for a long term holds the key for success. Let us find out how?

Financial Goals: For an individual, investing is an effective way to meet a financial goal. It is extremely important to define your investment objectives in clear and measurable terms. One should be able to foresee the trend in future expenses and also be able to estimate the current flow of savings in order to arrive at the likely amounts needed to be invested. Long term financial goals require a heavy amount and thus it is important that you stick to your investments to achieve such goals.

Economic Growth: In case of a country like India, it makes great sense to stay invested for a long time given that the potential for economic growth is extremely high due to strong demographics. India opened up its economy around three decades back and is still an emerging economy. Needless to say that the overall levels of consumer and output across the sectors are yet to hit the levels seen in advanced economies like the US, UK, Germany, Japan etc. This would support the corporate sales and profitability in the years to come, ensuring a steady growth in stock prices as well.Equity mutual funds would perform well over a long term in India due to this structural aspect of the economy.

Earnings Cycles: Economic cycles are very critical when it comes to determining long term investment returns from mutual funds. When the economy is slowing down, earnings tend to fall across the board. However, good companies, which have a consistent history of earnings growth over a period of many years, tend to see a good recovery in its sales and profitability once the economic cycle turns around. Due to this, the equity mutual funds returns could get affected when the economy is in downturn.

Government Policies: Government policies are normally planned keeping in mind the fundamental and deeply structural shifts in economic and business environment. Such policies could affect the stock markets quite severely in the short term. One can recall the hefty collapse seen in Indian markets after the Demonetization in November 2016 in this regard. However, also keep in mind the massive surge in local stocks when the government announced a cut in the corporate taxes in September 2019. Such kinds of policies play out in the most effective manner only over a long duration.

Cost Averaging: Rupee cost averaging denotes investing an amount at regular intervals, irrespective of the per unit price.By investing regularly, the investor takes the benefit of investing across market trends i.e. in bullish as well as bearish phase. However, for the cost averaging to fully work in your favor, it is imperative that you remain patient and remain invested through difficult times as well. This strategy is best suited for investors who do not have time to monitor the economic market. An investor can useSIPto use rupee cost averaging to his or her advantage.

Conclusion:
Successful mutual fund investors tend to waitfor a sizable time period to reap the rewards of their planning and decision making. Staying invested for long can be extremely rewarding over the period of time. Selecting the best mutual fund does not just mean choosing to invest in the fund which is providing the best returns. Mutual funds are of different types and generally speaking, for investors who have a high risk appetite, it advisable to invest in equity mutual funds which typically tend to provide with the highest amount of returns in long term though these investments are exposed to short term fluctuations in stock markets.

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