Long Duration Funds

What Are Long Term Funds?

The best long term mutual funds are market vehicles that keep the investor's money parked in market instruments for longer durations, typically for about 7 to 10 years. For example, selecting a Systematic Investment Plan that invests in the best long term mutual fund for ten years will make your investments compound over time as per the performance of the stocks the fund invests in over 10 years.

Typically, it is better not to pull out of long term mutual funds once you start to reap maximum benefits. Long term mutual funds are an investor-favourite because they help achieve long term financial goals, like children’s education.

Who Should Invest in Long Term Funds?

Long term mutual funds are best suited for investors who wish to accomplish their financial goals of the distant future. Think in decades: how much would you need your money to have grown for 10 years? Additionally, if you fall in any of the categories listed below, it is time you start searching for the best mutual funds to invest in for long term.

Longer Investment Horizon

Are you planning to park your money in the market for the long term? Mutual funds are the best option. Long term mutual funds are the answer for future financial goals like buying a house, a car, a child’s education or marriage, retirement corpus, or anything else you need for the future.

Need High Returns, But Not Right Now

Long-time mutual funds invest a major part of your money (about 65%) into equities. This means the fund typically yields higher returns because equities are market instruments that perform well when the market is high. In the long term, the investment corpus grows exceptionally well.

Not Looking for Fixed Returns

Since best long term mutual funds invest majorly in equities, there is no chance of receiving a fixed return (fixed returns can be set up by selecting a debt fund scheme instead of investing it in equities). If you do not need a “salary” from investment, then long term mutual funds are a great market vehicle to still make your money grow in the longer run.

Taxability of Long Term Funds

Long term funds in mutual funds are taxed a certain specific way. There are two categories of these funds: equity-oriented (where at least 65% of the corpus is invested in equities) and all the other kinds of investments.

For funds that invest in equities, the profits are liable for capital gains tax:

  • Short-term capital gains tax does not apply to long term funds, as in this case, the investment horizon is longer than one year.
  • Long term capital gains tax is levied at a rate of flat 10% without indexation benefits if you stay invested in long term funds for more than a year. However, for the first ₹1 lakh gain, the long term funds enjoy an exemption in taxation. Post that, the usual taxation regime applies.

Investors prefer investing in long term mutual funds because of the taxation benefits they provide: especially those investors that pay tax in the higher slabs of income tax.

Risks Involved With Long Term Funds

If you are looking for long term mutual funds to invest in, take some time to evaluate the risks associated with them. Here is a list of potential risks you need to be aware of:

Risk of Losses

Investing money in the market anyway constitutes risks. However, with long term mutual funds, the risks are higher. This is because they invest in equities. These market instruments are sensitive to market behaviour and may fluctuate wildly depending on the performance of the stocks they invest in. Make sure you understand the stocks your fund invests in before putting money into it.

No Guarantee

Mutual funds do not guarantee high returns. For example, if your fund went into a loss for one year, and the very next year, it performed exceptionally well. If you average the fund’s performance over the term of investment, the yield is not very impressive at the end.

Payout at Current NAV

You have the option of pulling out of long term mutual funds. However, the redemption you receive will be per the prevailing Net Asset Value of the entire fund. If the fund is making losses, it will reflect on your corpus in the same proportion.

Advantages of Long Term Mutual Funds

Despite the risks involved, smart investors still keep their money parked in the best MF for long term investment. They have certain unbeatable benefits that other market vehicles rarely provide:

Absorption of Market Risks

The equities market is fraught with risks. The performance of stocks that your fund invests in keeps fluctuating. However, in the longer investment horizon, these fluctuations stop being significant. The average performance of a long term fund is still better than most.

Big Corpus

At the end of the investment term, your money will have grown into a sizeable amount that can absorb the risk of inflation as well. You can utilize this corpus for whatever dreams you started investing in. The performance of equities is generally very good over longer periods.

Small Investment

You can start with a long term mutual fund SIP investment with as little as ₹500 a month. The benefit of compounding makes the returns better than fixed asset investments.