Summary

Long-term investments can play a crucial role in wealth creation. Find out how you can use mutual funds for long-term wealth generation.

Content

We all have various long-term financial objectives like retirement planning, funding a child's higher education and marriage, accumulating a down payment for a home, etc. While your regular income and savings can help you with these objectives too, a significant portion of this money is spent on managing basic expenses and achieving short-to-medium-term goals.

Thus, for such long-term objectives, you need to look for investments that can help you build a corpus. The wide range of options makes mutual funds a smart choice for such objectives. Let’s take a look at what they are and how they can help you with long-term wealth creation-

What are Mutual Funds?

Mutual funds pool money from investors and invest according to the scheme's objectives. Depending on the type of fund you choose, the investment can be made in equities, money market instruments, bonds, etc. Every scheme has a fund manager responsible for making investment decisions according to the scheme's objectives.

All the mutual funds have Net Asset Value or NAV, calculated per the market value of all the securities held in a scheme. An investor can purchase fund units at a lower NAV and sell at a higher NAV to make a profit. However, the investment will lead to negative returns if the selling NAV is lower than the buying NAV.

How to Select the Right Mutual Fund Scheme?

For wealth creation with mutual funds, select schemes based on these factors-

• Investment Objectives

  Understand your financial objective and the duration within which you’d like to achieve the objective to choose a fund category that best matches your requirements. For instance, if the goal is retirement planning and you still have 15-20 years to retire, equity funds can be an ideal choice.

• Risk Appetite

  You should also consider your risk appetite before investing in mutual funds. The risk profile of every mutual fund category and even the subcategories can vary significantly. For instance, equity is riskier than debt, and small-cap equity schemes carry higher potential risks than large-cap equity funds. The risk of all mutual funds is represented through a 'Riskometer' in the Scheme Information Document (SID), ranging from very low to very high.

• Asset Allocation

  Asset allocation is vital to building a diversified portfolio. It is generally recommended that investors should add a mix of asset classes to their portfolio and avoid overexposure to any particular asset class. If you’ve already made some investments, analyze your portfolio before investing in mutual funds.
  
  Types of Mutual Funds

Which Mutual Funds are Ideal for Long-Term Investments?

Most investors choose equity mutual funds for long-term wealth creation. There are 11 different types of equity mutual funds available in India to ensure every investor can select schemes as per their objectives and risk appetite. As these schemes can be highly volatile in the short term, investors should prefer investing in these schemes for a time horizon of 5-10 years or more.

Also, while equity is preferred for long-term wealth creation, diversification is important too. So, you can also consider adding medium and long-duration debt funds to your long-term investment portfolio. When equity markets start underperforming, these debt funds can add some stability to your portfolio. In addition, hybrid funds that invest in a mix of equity and debt can also help with diversification.

Also read – What is Hybrid Mutual Fund?

The Importance of Consulting a Financial Advisor

Building a long-term investment portfolio can be challenging for someone new to the investing world. As mistakes can prove costly, it is best to work with an investment advisor to build a long-term portfolio.

The vast experience and knowledge of the advisor can help you choose mutual funds that align with your goals and risk appetite. The advisor can also help you make timely adjustments to your portfolio to help you optimize your returns and risks through different market cycles.

Long-Term Wealth Creation with Mutual Funds

To successfully achieve your long-term financial goals, it is important to start investing as early in life as possible. Mutual funds with a plethora of scheme options and affordability are ideal for every investor serious about their long-term objectives.

Build a diversified investment portfolio with adequate investments in equity mutual funds to get closer to your financial objectives and live a more confident and fulfilling life.

Also Read About - What are target maturity funds

Also Read - What is Wealth Creation?

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.