5 Best Mutual Fund Types for Long-Term Investment Success

Sep 23, 2023 / Reading Time: Approx. 15 mins

Listen to 5 Best Mutual Fund Types for Long-Term Investment Success

00:00 00:00

5 Best Mutual Fund Types for Long-Term Investment Success

In today's ever-changing financial landscape, individuals are increasingly realising that making long-term investments is the key to securing their financial future. The question that often arises is, "Where should I invest my money for the long term?" or "What kind of mutual funds are ideal for achieving my long-term financial goals?"

In this comprehensive article, I will delve deep into the realm of long-term investing and explore the selected top five mutual fund types tailored for long-term investment strategies.

But before that, let me tell you...

Why Invest for a Long Term?

It is essential to remember that investing is like a game with some inherent risks, and thorough research is vital before making any investment decisions. So always do your homework before you decide where to allocate your money. However, adopting a long-term mindset and embracing long-term investment strategies can significantly contribute to your financial well-being.

Long-term investing is like planting a tree. At first, you sow a seed and take care of it for nurturing over time to see it grow into a flourishing entity. Similarly, with investments, you put your money in, manage it prudently, and let it grow into a substantial corpus over time. The best thing is, over time, your money makes even more money because of the power of compounding. This means your money generates more money, helping you accumulate savings for significant life goals and unexpected financial emergencies.

Furthermore, long-term investing acts as a shield when the financial world gets a bit crazy and there is turbulence in the markets. While short-term fluctuations are common in the stock market, a long-term perspective enables you to stay calm during market ups and downs. While the stock market might jump around in the short run, it usually goes up over a long time. So, if you patiently wait out the tough times, you have a good chance of ultimately reaping rewarding returns and making some good money in the end.

Another prudent strategy in long-term investing is diversification. Rather than putting all your money into a single asset class, it is wise to spread your money across various assets such as stocks, bonds, precious metals, real estate, and more. Diversification helps you spread out and mitigate risk by reducing the impact of underperforming assets and makes it more likely that your money will grow over time. Additionally, long-term investments offer tax advantages, as long term capital gains are typically taxed at a lower rate. This tax efficiency helps you to retain a more significant portion of your earnings, further bolstering your long-term financial gains.

Moreover, long-term investing stops you from making quick, emotion-driven decisions based on what is happening in the stock market today. It encourages discipline and discourages impulsive, emotion-driven decisions based on daily market fluctuations. It teaches you to stay calm and patient when things get tricky in the financial world and aligns your actions with your long-term financial goals.

So, sticking with your investments for a long time gives you a good chance to become financially stronger and achieve your dreams.

Now, let me tell you about a way to grow your money over a long time, by investing in something called "Mutual Funds."

In this video, our Analyst - Vivek Chaurasia extensively covers the '5 Best Mutual Fund Types for Long-Term Investment', providing valuable information for investors. Don't miss it!

 

Mutual Funds: A Path to Long-Term Investment

Imagine embarking on a journey to steadily grow your wealth over an extended period, much like planting a tree and witnessing its transformation into a majestic one. Mutual funds are one of the favoured vehicles for achieving this goal. Managed by financial experts, mutual funds cater to individuals seeking long-term wealth accumulation.

In fact, over the past decade, mutual funds have emerged as a preferred choice for long-term investors, primarily due to their ability to offer diversification and professional management. These two factors play a pivotal role in the success of mutual fund investments.

Here, I would like to divide the long-term mutual fund types into 5 major buckets. Let's take each of them one by one:

 

Fund Type 1: Equity Funds for Steady Growth (Large Cap Oriented Funds)

Imagine you want your money to grow steadily. Some equity funds are designed for steady growth over the long term by primarily investing in stocks of large-sized companies. Stocks represent ownership in companies ranging from technology firms to automotive giants and consumer-driven companies. By investing in equity funds, you are essentially buying these tiny pieces of many different companies from diverse industries, including technology, healthcare, energy, and consumption.

Equity funds tailored for steady growth typically focus on large-cap stocks. Large-cap stocks belong to well-established, stable companies like ICICI Bank, HDFC Bank, Infosys, Reliance Industries, TCS, and others. These prominent companies have been around for a while and are considered relatively safe investments. In fact, the Securities and Exchange Board of India (SEBI) defines the top 100 stocks in terms of market capitalisation as large-cap stocks.

Large-cap equity funds prioritise safety and aim to generate consistent returns for the investors. They diversify their portfolios across a multitude of prominent companies, typically allocating more than 80% of their assets to large-cap stocks.

Other fund categories that exhibit substantial allocations to large-cap stocks, such as Focused Funds, Value Funds, and Flexi Cap Funds, also offer flexibility while adhering to the principles of steady, large-cap-oriented investing.

Top-performing Equity Funds for Steady Growth

The securities quoted are for illustration only and are not recommendatory.
Selected on the basis of 3-year Rolling Returns as of 20-Sep-2023
Past performance is not indicative of future returns; Source: ACE MF

 

Investors prefer large-cap equity funds for steady and safe wealth growth. These funds focus on big-company stocks, offering the potential for good returns with lower risk. If you are willing to add a bit of excitement while saving for your long-term goals, large-cap equity funds are an attractive option as it promotes steady wealth accumulation over time.

 

Fund Type 2: High Growth Equity Funds (Mid Cap Heavy)

If you are a bit more adventurous and want your money to grow faster, high-growth equity funds are an enticing choice. These funds primarily focus on stocks of mid-sized and small-sized companies that have the potential to grow rapidly. However, this potential for high returns comes with increased volatility, making these funds akin to rollercoasters in the realm of investing.

High-growth equity funds allocate a significant portion of their assets to mid-cap companies, which, while not as large as industry giants like Reliance or Infosys, exhibit substantial growth potential. SEBI defines stocks ranked from 101st to 250th in terms of market capitalisation as mid-cap stocks and those beyond the 250th position as small-cap stocks.

Some mid-cap-oriented growth funds actively seek out emerging mid-sized companies that exhibit tremendous growth potential and invest in them. These companies are viewed as future success stories in the making. However, it is essential to note that the stock prices of mid-cap companies can be a bit shaky during uncertain times, so there is more risk involved. But if you are patient and can handle some bumps along the way, these funds can be rewarding in the end.

Categories such as Large & Mid Cap Funds, Multi Cap Funds, Mid Cap Funds, and Small Cap Funds allocate significant portions of their portfolios to high-growth stocks of mid-sized and small-sized companies.

Top-performing Equity Funds for High Growth

The securities quoted are for illustration only and are not recommendatory.
Selected on the basis of 3-year Rolling Returns as of 20-Sep-2023
Past performance is not indicative of future returns; Source: ACE MF

 

High-growth equity funds are akin to investing in the rising stars of the business world. While they entail higher risk, they offer the potential for significant long-term gains. Investors who are risk-tolerant and willing to weather market fluctuations may consider high-growth equity funds as part of their long-term investment strategy.

 

Fund Type 3: Index Funds for Market Equivalent Growth (Passive/Index Funds)

Imagine you want to invest in the stock market, but you don't want to pick individual stocks, or you don't want to pay high fees to experts. Still, you want to let your money grow with the markets. This is where Index Funds come in.

Index Funds are designed to replicate the performance of a specific market index, such as the S&P BSE Sensex, Nifty 50, and others. These funds are an ideal choice for investors seeking exposure to the stock market without the complexities of individual stock selection or the high fees associated with professional fund management.

Index Funds function as a basket that mirrors the performance of a designated index comprising a select group of companies. For instance, the S&P BSE Sensex consists of 30 prominent companies, while the Nifty 50 comprises 50 largest companies. By investing in an index fund tracking these indices, your money is distributed across all the companies within the respective index. It effectively reduces the risk associated with individual stock investments.

Index Funds adopt a passive investment approach, replicating the index's composition without any active management or stock selection. This passivity translates into lower fees when compared to actively managed diversified equity funds.

Stock markets tend to go up over time. Index Funds are an easy and cheap way to join in on this growth without needing to do much. By investing in index funds, you can let your money grow steadily over time while minimising the need for constant monitoring and decision-making.

Popular Index Funds for Broad Market Exposure

The securities quoted are for illustration only and are not recommendatory.
Selected on the basis of AUM as of 31-Aug-2023
Past performance is not indicative of future returns; Source: ACE MF

 

Index Funds are convenient for investors seeking a hassle-free, cost-effective way to invest in the stock market for the long term. When you invest in index funds, your money grows in alignment with market trends, and you do not need to worry about picking the right stocks.

 

Fund Type 4: Hybrid Funds for Diversification (Aggressive Hybrid And Multi-Asset Allocation)

Hybrid Funds offer a mix of steady growth and safety. Often referred to as balanced funds; they strike a balance between growth and stability by investing in a combination of stocks and bonds. These funds recognise the importance of diversifying across asset classes while preserving growth potential.

Hybrid Funds avoid placing all their capital in a single asset class and instead allocate it between stocks, which offer growth potential but come with higher risk, and bonds, which are considered relatively safer but do not grow as much.

So, hybrid funds create a balanced mix to give you some growth potential with stocks and stability with bonds. They are good for people who want a bit of both in their investments. Hybrid funds could be an excellent choice for investors looking to diversify their portfolios while maintaining a certain level of growth potential.

Indian mutual funds offer a variety of hybrid fund categories, including Conservative Hybrid, Aggressive Hybrid, Dynamic Asset Allocation, Balanced Advantage, Multi-Asset Allocation, and more.

Top-performing Hybrid Funds for Diversification

The securities quoted are for illustration only and are not recommendatory.
Selected on the basis of 3-year Rolling Returns as of 20-Sep-2023
Past performance is not indicative of future returns; Source: ACE MF

 

Hybrid funds cater to investors with a moderate to high risk appetite who desire a blend of growth potential and reduced risk. These funds provide a taste of both growth and stability within a single investment, making them an attractive option for those seeking balance in their investment portfolios.

 

Fund Type 5: Bond Funds for Stability (Dynamic Bond Funds And Banking & PSU Debt Funds)

Bond Funds primarily invest in fixed-income securities, encompassing government bonds, corporate bonds, and money market instruments. Bonds are renowned for their stability and safety. They are like lending your money, and in return, you get regular interest payments along with the return of invested capital upon maturity. Bond funds prioritise stability and regular income, making them an appealing choice for risk-averse investors.

However, it is crucial to note that bond funds are not entirely devoid of risk. They are exposed to interest rate risk and credit risk, depending on their portfolio composition. Therefore, it is imperative to choose bond funds prudently, with a focus on those that emphasise government and quasi-government instruments, minimising exposure to higher credit risk.

Indian mutual funds offer various categories of debt funds, ranging from overnight funds with a one-day duration to long-duration funds exceeding ten years. The level of interest rate risk increases with the duration, while the level of credit risk is influenced by the exposure to instruments issued by private entities. Hence, one should prioritise funds with higher allocations to government and quasi-government instruments for added safety.

Top-performing Bond Funds for Stability

The securities quoted are for illustration only and are not recommendatory.
Selected on the basis of 3-year Rolling Returns as of 20-Sep-2023
Past performance is not indicative of future returns; Source: ACE MF

 

Bond Funds provide investors with a steady stream of income, making them particularly attractive to retirees. Bonds serve as the stable component of an investment portfolio, offering a counterbalance to the volatility of stocks and ensuring a smoother investment journey. They balance out the risky parts of your investment portfolio and are ideal for individuals aiming to preserve capital while achieving a level of financial stability.

 

To summarise

In a nutshell, long-term investing is a smart way to grow your money over time. It helps in a strategic approach to financial planning and offers an element of safety, growth potential, tax advantages, emotional stability, and alignment with economic growth.

Mutual funds serve as a convenient vehicle for implementing long-term investment strategies. They offer different paths to achieve your long-term goals, whether it's equity funds for steady growth, high-growth equity funds, index funds for market equivalent growth, hybrid funds for diversification, or bond funds for stability. The key is to choose the one that suits your goals, maintain a long-term perspective, stay disciplined, and work towards the realisation of your long-term financial ambitions. The choice of mutual fund type should align with your financial goals, risk tolerance, and investment horizon. Long-term investors should carefully consider their options and conduct thorough research before making investment decisions. Just remember to do your homework and maybe talk to an expert if you are not sure. Seeking guidance from a SEBI-registered investment advisor can provide personalised insights and enhance the likelihood of successful outcomes.

Long-term investing is not just about accumulating wealth; it offers peace of mind and paves the way for achieving your life's most significant financial goals. With a solid long-term plan, you'll be on your way to making your financial dreams come true.

We are on Telegram! Join thousands of like-minded investors and our editors right now.


VIVEK CHAURASIA is the editor of FundSelect and FundSelect Plus, the flagship research services of PersonalFN.
Having over a decade of experience in analysing mutual funds, Vivek understands the functioning of the mutual fund industry very well and applies his financial and analytical skills to closely scrutinize each fund to his satisfaction.
Vivek joined PersonalFN as a Senior Research Analyst in 2009 and quickly adopted the philosophy of our research team, i.e. honest and unbiased research for naive investors who are tired of being mis-sold. Over these years, he has developed a robust fund selection and filtration model - 'SMART Score matrix' that has been tested across various cycles now and constantly looks for a scope to strengthen it further. Vivek follows the principle of safety first when it comes to picking funds for investors. That is the reason why he has a long list of rejected funds as compared to the ones he has endorsed so far.
Vivek is an avid follower of John C. Bogle (the founder of The Vanguard Group and the author of the bestseller book - Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor) and Warren Buffet (one of the most successful investors of all time)


Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

PersonalFN' requests your view! Post a comment on "5 Best Mutual Fund Types for Long-Term Investment Success". Click here!

Most Related Articles

India's Manufacturing Momentum: ICICI Pru Manufacturing Fund vs. Kotak Manufacture in India Fund India has the capacity to export goods worth USD 1 trillion by 2030 and is on the road to becoming a major global manufacturing hub.

Jul 12, 2024

Is It Wise to Invest in Sector & Thematic Funds And Small Cap Funds Now? Know Here Investors are aggressively investing in sector & thematic funds as well as small and mid cap funds, which is a worry.

Jul 12, 2024

5 Railway Mutual Funds to Ride the Growth of India's Rail Network This article will evaluate the top mutual funds to invest in 2023 that have a high allocation to Indian Railway stocks.

Jul 10, 2024

Evaluating Mutual Fund Performance: Rolling Returns vs Point-to-Point Returns Comparing the historical returns of mutual funds is a key metric that helps investors shortlist schemes for their portfolio.

Jul 09, 2024

Sensex at 80,000! How to Approach Equity Mutual Funds Now The bellwether, BSE Sensex hit an all-time high of 80,392.64 points last week (on July 4, 2024). Investors ought to be careful when investing in the equity markets and now devise a sensible investment strategy.

Jul 09, 2024

Most Popular

Manufacturing Mutual Funds Shine. Are they Worthy of Your Investment Portfolio?Currently contributing around 17% to the GDP, the manufacturing sector is expected to grow to 21% in the next 6-7 years.

May 06, 2024

6 Equity Mutual Funds to Benefit from India’s Defence SectorThe potential to benefit by sensibly taking exposure to defence sector stocks is huge!

Apr 17, 2024

Top 5 Mutual Funds with High Exposure to EV RevolutionThis article will evaluate the top mutual funds to invest in 2024 that have a high allocation to EV stocks.

Feb 06, 2024

Top 5 Mutual Funds That Are Betting on the Manufacturing BoomThis article will evaluate the top mutual funds to invest in 2023 that have a high allocation to Manufacturing stocks.

Sep 01, 2023

HDFC Mutual Fund launches HDFC Manufacturing FundHDFC Mutual Fund launches HDFC Manufacturing Fund

May 08, 2024