There are many mutual funds on the market. Each one is appropriate for your specific financial plan and will help you achieve your goals within a certain time frame. Every mutual fund is suitable for different investors. Not all mutual fund schemes are meant for everyone who wants to invest in mutual funds. How can one pick from over a thousand mutual funds available on the market?
Your financial goals, risk preferences, financial situation, and time available to reach your goal are the key factors. The selection of the right set of mutual funds to invest in is an individual process. There are no formulas or templates. However, there are some fundamental truths about mutual fund investing that you should be aware of.
Mutual funds can be divided into three categories: equity, fixed income, or debt, and hybrid. Equity mutual funds invest over 65% of their assets, i.e. the money they pool from investors into stocks or equity. Fixed income mutual funds, also known as debt mutual funds, invest the majority of their assets in fixed income securities such as bonds, money market instruments and debentures. Hybrid mutual funds invest in both equity and debt assets. The investment objective of a fund determines the allocation between equity and debt securities in a hybrid fund.
Because equity funds are oriented towards equity, they are better suited for long-term investment purposes. They are less likely to be subject to volatility or fluctuations in short-term. Stocks and equity, as they are also called, are volatile. This means that their prices can fluctuate throughout the day. Equity funds are best for long-term investments. You don’t need to sell or redeem your investments within three years. You’ll be amazed at the long-term results of equity mutual funds if you keep them invested for longer than five years. Equity has been the most successful asset class over the long term.
Two reasons explain the history of stocks or equity as an asset class outperforming other asset classes. First, although equities can be volatile for a few days, months, or even a couple of years, they tend to increase in value more than other asset classes because they reflect the profit or value that businesses generate. The value investors will pay for a company’s business performance is reflected in its stock price. As investors begin buying stocks, companies’ stock prices rise as they grow in size and profitability. This leads to increased demand for stocks from well-performing companies, and consequently, stock prices rise. The performance of the companies that drive the country’s economy can be reflected in no other asset class. Therefore, the returns these asset classes generate are lower than those offered by equities to their investors.
Equity mutual funds, which invest the money of their shareholders in stocks, also offer superior returns as compared with other asset classes. They are therefore one of the best long term investments for individual investors. Their superior performance over other asset classes such as gold, debt, and real estate is due to their power of compounding. This allows for a superior return over a longer period of time that far surpasses any other asset class.
Equity mutual funds are a good option for long-term investments. You should hold them for at least three to five years before you can see the true potential of wealth creation. If you don’t know much about the different equity mutual funds on the market, it is best to consult a mutual fund advisor. If you have an understanding of the subject, it is possible to invest online.