Why Is it Important to Stay Invested in Equity Mutual Funds?

by Vinaya HS on February 23, 2018

in Finance

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In order to achieve wealth maximization, it is important to chalk out your long-term financial goals. The decision to invest across different avenues should be based on these goals and the tenure within which you want to achieve them. Prioritize the goals before you make an investment decision and choose assets that offer a higher return with low risk.

One of the most important principles of investment is to remain focused. Analysts suggest that constant stressing or daily valuation of the portfolio leads to irrational decisions and does not allow the investment to grow.

Importance of long-term investment in equity

Investors choose to invest in mutual funds for the diversification it offers. Additionally, it ensures that the risk is low and the returns generated are high. Mutual funds are managed by fund managers who invest in equity and debt options. It has been noted that stocks have shown higher returns as compared to any other asset class, although they are high-risk investment instruments. But the key to investment in equity is patience. Many investors do not have the patience to wait for a period longer than three years and they end up withdrawing the fund in case there is a fall in the market. Further, investors are impacted by the ups and downs of the market due to which they take irrational decisions and withdraw from a fund when it is not performing well.

It is always recommended that investors should invest in mutual funds for the long term. But it is not possible to remain invested for long, if you are short on liquidity or have an uncertain financial expenditure to cover. With equity funds, there is a benefit of opting for a Systematic Investment Plan (SIP). Depending on your financial goals, you may save and invest each month into one of the mutual funds. The SIP is ideal for long-term investment and investors should not stop their SIPs when the markets are low. In addition, with an SIP, you may take advantage of rupee cost averaging when the market is bearish. In other words, it means that when the market is down, with the same fixed sum of money, you will be able to purchase funds at a lower Net Asset Value (NAV), which will eventually reduce your transaction cost.

It is a clear fact that the longer you remain invested in an asset, the higher are your returns. This is primarily because the risk associated with an investment in equity smoothens out over a long duration. With mutual funds, the risk may be reduced to a minimum with diversification of funds. Irrespective of the ups and downs in the market, which may lead to an uncertainty in returns, you need to remain invested throughout the period. If you remain invested for a duration of ten years or more, you will notice that through all the market volatility, the corpus has only grown.

Most investors do not see any investment period exceeding three to five years; this is not enough to maximize wealth. Do not sell the stock when you see that the market is crashing; this way you will end up selling low. Some investors do not make any profits even when the market is at the highest, while some others make profits with average market volatility. You may deal with the volatility of the market as long as you are not making losses.

Invest in mutual funds to maintain a low risk throughout your period of investment. Successful investors make the choice after a thorough research of the market and do not make irrational entry and exit decisions. The purpose of any mutual fund is to allow systematic investment and to avail of the benefit of compounding of interest. Study the performance of the funds in the last ten years and compare the returns before making an investment. Avoid the noise in the market; let it not concern you. Also, do not follow every market move. Keep saving and investing on a regular basis. The investment will grow in the long term and help you maximize your wealth.

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Thanks for reading this article. I'd love to hear your opinion. Please use the comments section below to share your thoughts. I frequently write new articles that also cover several other aspects of personal finance including credit cards, financial goals, health insurance, income tax, life insurance, mutual funds, retirement planning, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.

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