Marcel wants to save up for a vacation. Suhani wants to buy a home. Both of them want to meet their financial goals by investing in mutual funds. Is it the right choice? Of course! Mutual funds can be used to meet different investment goals with different investment horizons. The right question is, when to invest in mutual funds, what funds to invest in and how to invest depending upon your goals.
What is the time or investment horizon?
The time period over which an investor stays invested in a mutual fund is called the time or investment horizon. Determining the investment horizon depends upon the financial goal, the risk appetite as well as the income needs of the investor.
1. Short-term investment horizon
Short-term investments in mutual funds can range from 1 to 3 years. For instance, Marcel’s goal to save for a vacation is a short-term goal. He may want to go on vacation in a year or two. Since the duration is short, it is best to invest in funds that give relatively stable returns. He can invest in a mutual fund like a liquid fund, short-duration debt fund, or any other debt fund to meet his goal. The best time to invest in mutual funds for the short duration is as soon as one identifies their goal. This will give them more time to grow their money and meet their financial goal comfortably.
2. Medium-term investment horizon
Investments for a duration of 3 to 7 years are called medium-term investment horizons. These can be to meet goals like buying a car, saving for a house down payment or to meet educational needs. Typically, since investors have some time to save for such a goal, they can afford to take on some risk. This may be a good time horizon to buy stocks of large-cap companies with assured returns or invest in equity mutual funds. For slightly more risk-averse investors, hybrid funds can be a good choice. Medium-term investors can also take time to decide when to invest in mutual funds. The best time to invest in mutual funds like equity or hybrid funds for medium-term investors is when there is a market downturn. This helps getting more mutual fund units that have the potential to grow over 3-7 years.
i) Small-cap funds:
This type of equity funds involves those companies with a small capitalisation of less than 500 crores. It has higher growth potential and is the best choice for investors who are expecting higher returns. Only the investors who have a great knowledge of stocks can choose to invest in this type of funds.
ii) Balanced Funds:
If you are looking for equity funds that are a combination of both equity and bonds, then balanced funds is the one for you. Many investors may be looking for better income, financial safety and modest capitalisation. As the name itself says, balanced funds help them strike a balance between all their needs effectively.
3. Long-term investment horizon
When an investor wants to invest for 8-10 years or longer in mutual funds, it is called a long-term investment horizon. Typically, people who aim for retirement funds invest for the long term. This is the perfect situation to buy stocks. If one doesn’t want to take the risk to buy stocks directly, then investing in riskier mutual funds like small-cap or mid-cap equity funds can be a good option. The question of when to invest in mutual funds for the long term is irrelevant because the sooner you start, the more time you have for your money to compound. Since the time horizon is long, any fluctuations in the market will be evened out. You have enough time to make up for any losses.
What is the right time to invest in mutual funds?
The generic question of when to invest in mutual funds can be answered with: right away! Early investment, be it for short-term goals or long-term goals, gives you more time to compound your money. However, it is best to time the market when it comes to investing in equity funds. The best time to invest in mutual funds that are debt or hybrid is anytime!
So what are you waiting for? Go ahead and choose the best fund from Mahindra Finance Investment Solutions Portal.