4 MinsMar 2, 2023
Mutual funds are investment vehicles that pool money from multiple investors. This money is then used to buy a diversified portfolio of stocks, bonds or other securities.
A key benefit of mutual funds is that they offer professional management, diversification and convenience at a relatively low cost. However, mutual funds are not suitable for all investors
or all investment goals.
Mutual funds should be viewed as long-term investments and may not be appropriate for short-term purposes. Here are a few reasons why -
Beat market volatility:
Mutual funds, like all investments, are subject to market volatility. Their NAV can fluctuate significantly over short periods. If you buy a mutual fund and sell it a few days or weeks later, you could end up selling
at a loss. On the other hand, if you hold a mutual fund for the long term, you are more likely to ride out any short-term market fluctuations and potentially realise better returns over time.Trading costs:
Mutual funds often have transaction fees, which are charges that are levied when a security is bought or sold in the fund. These fees can eat into your returns, especially if you are trading frequently. By holding a mutual
fund for the long term, you can minimise the impact of these fees on your overall returns.
Tax implications:
Mutual fund investments are subject to capital gains tax, which is levied on the profit you gain when you sell your shares. If you hold a mutual fund for a short period, you are likely to be subjected to tax on gains
realised. On the other hand, if you hold a mutual fund for at least a year and a day (long-term capital gains holding period), you may be eligible for more favourable tax treatment on any gains you receive.
Risk of chasing performance:
If you focus on short-term performance when selecting mutual funds, you may end up chasing the fund that has already performed . This can lead to poor investment decisions and may result in under-performance,
as compared to a more disciplined, long-term approach.
Professional management:
One of the key benefits of mutual funds is that they offer professional management by experienced fund managers who are responsible for researching and selecting the securities that make up the fund's portfolio.
By holding a mutual fund for the long term, you can take advantage of the fund manager's expertise and potentially achieve better returns than you could by trying to manage your own portfolio.
Opportunity cost:
If you focus on short-term performance and trade frequently, you may miss out on opportunities to participate in long-term market trends or capture the benefits of compound interest. By holding a mutual fund for the long
term, you can potentially avoid the opportunity cost of missed gains and increase the chances of realising better overall returns.
[Also Read: Know the difference between open-ended and close-ended mutual funds]
Conclusion
Mutual funds can be a useful tool for building wealth over the long term, but they may not be suitable for short-term investment. Another option here is an SIP. Before investing in mutual funds,
it is important to carefully consider your investment goals, risk tolerance and financial situation. You should consult a financial advisor or professional to develop a diversified investment plan that is appropriate for you.
Axis Bank offers mutual fund advisory services. With a wide range of funds to choose from and the expertise of professional advisors, Axis Bank can help you create a customised mutual fund portfolio that aligns with your financial goals. Whether
you are a beginner investor or an experienced market participant, Axis Bank's mutual fund advisory services may be able to help you achieve your financial objectives. This also gives you an emergency cash option through loan against securities.
Know more online.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision
Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. *T&C apply
