How Long is Long Term in Mutual Funds? (2024)

How Long is Long Term in Mutual Funds? (1)In this article

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Article Content

  1. Long Term Investment in Mutual Fund
  2. How Long to Invest in Mutual Funds?
  3. When to Invest and When to Exit?
  4. Things to Keep in Mind for Long Term Investing
  5. Short Term Investment in Mutual Fund
  6. Short Term vs Long Term in Mutual Funds
  7. Conclusion

Mutual funds have diverse options to choose from. There are funds for every need and each time period. There are funds for the long term and short term. For tax purposes, short term and long term are defined.

In mutual funds, investing for the short term is synonymous with debt funds, and the long term implies equities. Investment advisors suggest investing for the long term funds. But how long is long term in mutual funds?

Is there a set defined period that defines the long term? Read on to find out more about the long term and how it is different from the short term.

Long Term Investment in Mutual Fund

Long term investments are usually for a period of more than three years. The top choices for long term investments are equity mutual funds and hybrid funds. These long term funds offer higher growth when compared to debt mutual funds and traditional investments. Long term mutual funds too like other mutual funds are subject to market risks. Hence they do not guarantee returns. Long term mutual funds are highly volatile.

How Long to Invest in Mutual Funds?

The long term refers to a period an investment is held if it exceeds one year. For tax purposes, this definition holds good. But from a mutual fund investment point of view, it doesn’t. Investing for more than a year is long term, but is it long enough to earn good returns?

In a bull phase, this certainly holds true. For example, in 2014 and 2017, all the categories of mutual funds gave double-digit returns. However, not all years give returns like these. In 2018, the returns from mutual funds weren’t that promising. And the gains from 2017 are almost being wiped off. Hence holding the investment for a year or two is not considered as long term.

So if the answer isn’t a year or two, then what is it? There are theories that the longer you hold a mutual fund investment, the higher will be the returns. There’s even a 15*15*15 rule, which says doing an INR 15,000 SIP monthly for 15 years will fetch 15% return (CAGR) at the end of 15 years.

These are theories and might work if one tries. But the market works differently. After a few years, the fund which one invests might not be ideal for the investor due to multiple reasons. For example, the fund’s strategy might change and might not meet the investor’s goals. Or, the fund might not even exist 15 years down the line. But this doesn’t mean investors shouldn’t invest for 15 years or more. With continuous monitoring of the portfolio, investors can mitigate this risk.

Learn: How to Invest in Mutual Funds

When to Invest and When to Exit?

Defining a certain period as long term is ambiguous. Mainly because all investors are different, and their goals can be different. In investing, two things hold at most importance. When to invest and when to exit.

The ‘when to invest’ problem is solved with SIP in the picture. Investing in mutual funds with SIP can help average the cost of investment and help in earning higher returns through compounding. When to exit an investment is the tricky part. Hence, investors are advised to invest based on their goals. Goal-based investing is a concept that has been gaining popularity for quite a few years. Investing with a specific goal in mind, setting the target amount, and the tenure for the goal can help solve the ‘long term’ problem. With a predetermined target date set for the goal, one need not worry about how long is long term.

But most certainly, not all investors invest based on goals. And most importantly, the market can undergo tremendous changes in this set period of the goal that can affect portfolio returns. Hence defining the long term is essential. Therefore we decided to find the answer.

In our usual way, we went about the task by analyzing data, and our conclusion is, hold your breath, 7 years!

Things to Keep in Mind for Long Term Investing

While it’s good to stay invested for the long term. It is essential to keep the following things in mind before investing for the long term in mutual funds:

Thorough Research

Research is the key to identifying the best suitable fund matching the investor’s financial goal. Thorough research about the fund as to its past performance, investment strategies, objectives, track record, etc. have to be considered before shortlisting. A comparative analysis will help in understanding the performance against its benchmark and category.

Diversify Investments

One of the best ways to balance risk is to diversify investments. Mutual Fund investments do it just right. Mutual Funds invest in a basket of securities. Selecting a fund that invests across different sectors can help in diversification. Therefore, helping in balancing risk.

Have a Strategy

Having a strategy for investment is as important as investing. For long term investments its important to plan and define a strategy. Sticking to it is necessary too. Its always advised having regular savings. For long term investments saving regularly will help in building a rich corpus. Frequently topping up the investments will help in accumulating more corpus faster.

Keep up with the market dynamics

Investing and forgetting is wrong. Always keep an eye on the market and its dynamics. This will help in keeping a tab on the performance of the funds. In the cases where the fund has not been performing consistently, one can easily make the shift to a better fund.

Be Patient

Panic selling will not help in achieving your financial goals. Patience is the key to earn higher returns over the long term. Therefore, stay put for longer durations and let the money do the hard work.

Learn Mutual Funds Risk

Short Term Investment in Mutual Fund

Short term investments are usually for a period ranging between a few days to three years. The top choices for short term investments are liquid funds and ultra short term debt funds. These short term funds offer higher returns when compared to traditional savings accounts. Short term mutual funds too like other mutual funds are subject to market risks. Hence they do not guarantee returns. Short term mutual funds are less volatile to interest rate cuts. Unlike traditional saving options like Fixed Deposits, short term funds are highly liquid.

Check Out Consolidated Mutual Fund Statement

Short Term vs Long Term in Mutual Funds

Long term and short term investments in mutual funds serve a completely different set of investors. Short term funds are suitable for low-risk investors who do not want exposure to equities. While long term funds are best suited for investors who are willing to take some risk and staying invested for longer durations.

ParticularsShort Term InvestmentsLong Term Investments
DurationUp to three yearsMore than five years
Interest RateLess sensitive to interest rate cutsHighly sensitive to interest rate cuts
ReturnsHigh returns when compared to traditional savings schemesHigh returns, benefit of the power of compounding.
RiskLow risk when compared to long term investmentsHigh risk when compared to short term investments
GoalsSuitable for short term goals such as vacations, buying a car, etc.Suitable for long terms goals such as retirement, child’s education, etc.

Also Read ETF vs Mutual Fund

Conclusion

We have come up with a magic number of 7 years for the long term. But does this number hold value in long term investment if people don’t follow the rules of investing? Certainly not. Investing for the long or short term requires a strategy, discipline, and consistency. It requires continuous monitoring of the portfolio. And, most importantly, patience.

For most investors, retirement is the primary goal. But so are other life goals like buying a car, owning a house, or even going on a vacation. It is always advised to start investing early, so the investors are in a position to take risks in their early years of investing and earn more through compounding.

The longer the period of investing, the higher will be the returns. When the time horizon is in decades, market downturns and other risks seem minor, and returns will be higher.

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FAQs

How Long is Long Term in Mutual Funds? ›

The ideal duration for staying invested in mutual funds can vary based on individual financial goals, risk tolerance, and investment horizon. However, generally, it's recommended to stay invested for at least 3 to 5 years to potentially ride out market fluctuations and benefit from compounding returns.

How long term are mutual funds? ›

Short-term mutual fund investments are generally meant for tenure of up to 3 years. Long-term mutual fund investments require a minimum tenure of 5 years.

How long should you stay in a mutual fund? ›

When your investment is to meet a long term goal, hold the fund as long as you can, even longer than the completion of the STCG period if the fund has been able to deliver returns better than category average consistently.

How long should a long term investment be? ›

A long-term investment is one intended to be held for a significant amount of time - at least five years, but typically ten or more.

How many years is considered long term? ›

How long are short- medium- and long term? There are no exact definitions, but short-term usually means a period shorter than two years, medium-term covers a range from 2 to 5 or 10 years and long-term is a period longer than 5 or 10 years.

What is a long-term mutual fund? ›

Long Duration mutual funds refer to funds that have excellent potential and the ability to provide high returns.

Is it good to hold mutual funds for long-term? ›

It is, however, important to remember that mutual fund investment gives good returns when you stay invested for a long period. This is vital to keep the impact of volatility to minimum.

When should you exit a mutual fund? ›

If a fund consistently underperforms over multiple periods and fails to deliver satisfactory returns, consider exiting the investment. Research and select funds with a similar investment objective but better track records and performance history to redirect your investments.

What is the 30 day rule on mutual funds? ›

To discourage excessive trading and protect the interests of long-term investors, mutual funds keep a close eye on shareholders who sell shares within 30 days of purchase – called round-trip trading – or try to time the market to profit from short-term changes in a fund's NAV.

Should I sell or hold my mutual funds now? ›

Times to Sell

If the fund manager has changed. If the investment plan and strategy of the fund has been altered. If the fund has been consistently underperforming. If the fund sees too large a growth to fulfil the goals of any investor.

What does Warren Buffett say about long term investing? ›

One of the most important Warren Buffett quotes on investing that you can take in is, "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes."

What is a realistic long term investment return? ›

The average stock market return is about 10% per year, as measured by the S&P 500 index, but that 10% average rate is reduced by inflation. Investors can expect to lose purchasing power of 2% to 3% every year due to inflation.

How many years is a long-term financial goal? ›

However, a general rule for long-term goals could be anything that typically takes you five years or longer to accomplish. Some examples of long-term financial goals may include: Saving for a down payment on a house. Funding your retirement.

Is 2 years considered long-term? ›

Long-term relationships tend to last anywhere from two to three years, with couples breaking up around this time. Not surprisingly, this is when many couples experience the oxytocin dip and feel less infatuated with each other. They may begin to notice relational issues that bother them or feel unresolvable.

How long are long-term capital gains? ›

Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.

Can I invest in mutual funds for 10 years? ›

Equity mutual funds like Quant Small Cap Fund and Nippon India Small Cap Fund, have shown significant growth, with high XIRR percentages over the years. Around six equity mutual funds turned a monthly investment of Rs 25,000 to Rs 1 crore in a 10 year horizon, an analysis by ETMutualFunds showed.

Is mutual funds good for 2 years? ›

Higher Return Potential: Top mutual funds have the potential to yield higher returns compared to traditional bank savings or fixed deposits, especially over the last two years. They offer exposure to a variety of assets, including stocks and bonds, which have historically outperformed other types of investments.

Do mutual funds pay out monthly? ›

A mutual fund distribution represents the earnings of a fund being passed on to the individual investor or unitholder of the fund. Q: How often are distributions made? The frequency varies by the specific fund – distributions can be paid monthly, quarterly or annually.

What is the average return on mutual funds in 10 years? ›

Highest Return Mutual Funds in Last 10 Years
Fund Name5 Years Return10 Years Return
Quant Active Fund (G)30.9%22.8%
Quant Large and Mid Cap Fund (G)28.3%22.7%
HSBC Small Cap Fund Fund (G)27.3%22.5%
Quant Flexi Cap Fund (G)32.3%22.3%
16 more rows

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