Mutual Funds Warren Buffet famously said, “Do not take yearly results too seriously. Instead, focus on four or five-year averages.” And if you’re an aspiring long-term investor, this is your rule of thumb.
You may be interested in long-term investing for several reasons. Perhaps because you want the benefits of compounding your wealth, you want lesser investment risks or a lower total investment cost. Maybe you want to invest in mutual funds because of the smaller capital outlay while investing.
Whatever your reason for investing in long term mutual funds, you must start by looking at the different categories of mutual funds first. Here’s a comprehensive list of long-term mutual fund categories to help with it.
- Small-cap Funds
When you put your money in a small-cap fund, you put a large portion of your investment corpus into equities of small-cap companies. According to SEBI (Securities and Exchange Board of India), these are companies marked below rank 250 in market capitalization or small companies with a market capitalization of lower than Rs. 500 crores.
So, small-cap funds are extremely volatile investment options, but they can offer high returns if they perform well. Keep in mind that small-cap mutual funds come with a liquidity period of around 25 days. With a long investment period of over 10 years, investors like you can avoid short-term liquidity problems and get better returns.
- Mid-cap Funds
Mutual fund investments in stocks of mid-cap companies or companies with a rank between 101 to 250 in terms of market capitalization are termed mid-cap funds. These companies are known to have high-growth potential and a business plan to back it up, even if they come with higher risks. The best part? They have an investment horizon of a minimum of five years, making them an excellent investment avenue for long-term investors like you.
- Large-cap Funds
These funds invest in stocks of large-cap companies of companies ranking between 1 and 100 in terms of market capitalization. Since such companies are industry leaders in their segments, buying these stocks also requires a large amount of capital. Therefore, if you decide to invest in large-cap funds, you must have buying and holding strategies in place. This will help you gain better returns by lowering the investment cost.
- Flexi-cap Funds
Small-cap, mid-cap and large-cap funds have guidelines regarding the investment ratio prescribed by SEBI. But flexi-cap investments are not bound by such regulations. So, investment managers can choose equities based on their expertise and have greater control over managing risks and balancing wealth creation. Keep in mind that flexi-cap funds are also high-risk investment options. Therefore, they are perfect if you have an investment horizon of 5 years or more.
Over to You
Now that you know the different categories of long-term mutual funds, all you need to do is select one and choose the right mutual funds to invest in.
Remember to check the fund's performance and the risks involved before investing. This is the best way you will get better returns on your long-term investments.
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