Mutual Funds: Equity funds are better suited for long-term investment goals, say experts

Mutual funds are fast gaining traction among the public in general. However, investors are still not fully aware of the diversification of their portfolio, what kinds of mutual funds are suitable for their investment goals and how to maximise their returns? If we go by the experts' advise people have three types of investment goals — short-term, mid-term and long-term. They say for short-term goals, mutual funds should be avoided as it takes around two to three years for indexing of the NAV and hence it starts giving return or return on the mutual fund investments become visible after two to three years. For mid-term which spans from 7-10 years, an investor should go for balanced mutual funds while for long-term investment goals one should go for the equity or ELSS mutual funds as it gives around 2.5 to four per cent more than a normal mutual fund plan.

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Elaborating upon the investment goals and its connection with the type of mutual funds an investor should choose, Tanveer Alam, MD, Fincart said, "An investor does invest to achieve one's investment goals. so, the selection of the plan becomes important for achieving their investment goals. If we go by the psychology of an investor, he or she would look at the return that a plan gives rather how much a plan would return at the time of maturity. One should look at a plan through this angle and then decide which plan he or she is going to choose for investments." However, Tanveer Alam of Fincart said that for mid-term investment goals like buying a car or downpayment required for availing a housing loan, a fund for child studies etc., one should go for the balanced mutual funds as the risk factor involved in these types of mutual funds are quite low. But, for long-term investment, say retirement planning, the wedding of daughter etc., one should opt an equity or ELSS mutual funds as it generally gives at least 12 per cent returns post-tax payment.

On how much extra returns an investor can get by choosing an ELSS mutual funds for his or her long-term investment goals Kartik Jhaveri, Director — Wealth Management at Transcent Consultants said, "Equity or ELSS mutual funds are offered to give better returns than the market performance. It's fund managers are supposed to outperform the markets and give at least 2.5 to 4 per cent extra returns in the long-term." He said that for long-term investment, ELSS mutual funds would give around 2.5 to 4 per cent extra returns in comparison to customary long-term mutual fund plans. Kartik Jhaveri of Transcent Consultants advised investors to diversify their portfolio in large-cap, mid-cap and small-cap as they help an investor to minimsie his or her loss when the market is on nosediving sprees. 

So, if we go by the expert opinion, with equity or ELSS mutual funds with diversified fund allocation for long-term investment goals, an investor can expect to achieve 2.5 to 4 per cent higher returns than customary mutual funds.