The time frame over which investors stay invested in a particular asset class is referred to as an investment horizon. Determining the investment horizon is one key decision an investor must take in the investing journey.
Broadly speaking, mutual funds can be categorised into equity and debt mutual funds.
Equity mutual funds are mutual fund schemes that predominantly invest in the stocks or shares of companies listed on the stock market. Let’s look at some reasons why it is better to invest for a long time frame in the equity market.
Depending on the type of mutual funds, the time horizon can be classified as short term, medium-term and long term funds.
Short term mutual funds have a time horizon of 1-3 years.
Medium-term mutual funds have an investment horizon of 3-5 years.
Long term mutual funds have an investment horizon of 10 years or more.
Since the equity market is volatile, it is advisable to invest for the medium to long term. In a time frame of 3-5 years and beyond, even despite the volatility, markets tend to give an averaged out return. As a reference, over the past 5 years, NIFTY 50 has given a 14% CAGR which proves investing for the long term is a great strategy.
Even from the perspective of paying tax, the equity market rewards investors who invest for the long term. In India, there are two types of capital gains tax:-
Short term capital gains tax - Tax paid on capital gains for assets owned for a year or less.
Long term capital gains tax - Tax paid on capital gains for assets owned for more than a year.
Short term capital gains tax is 15% whereas long term capital gains tax is 10% for gains over 1 lakh. Hence it is advisable to invest from a long term perspective.
We often invest so that we can fulfil our dreams such as that of buying a house, purchasing a car, having a big fat Indian marriage or getting into our dream college.
While there are other more stable asset classes, equity mutual funds are a great instrument for high returns over a long term time horizon.
One can easily invest in mutual funds as a lump sum amount or a consistent SIP plan for 5-10 years.
Like any other decision, the decision of an ideal time horizon requires a lot of planning. It is important to consider your financial goals, aspirations and expectations before you decide the time frame and the mutual fund you wish to invest in.
It is often said that a consistent patient investor always wins in the long term.
Warren Buffet rightly said that “The stock market is a device for transferring money from the impatient to the patient.”
How to Analyse Mutual Funds for Big Returns | Things to Know Before Investing in Mutual Funds | Mutual Fund - Need of Financial Plan | How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account