If you are a beginner, there is a high chance that you will feel like selling mutual funds and getting out of the investment as soon as possible. The regular fluctuations in the fund's value tempt you to sell these funds and get all the profits right away.
If you are planning to do the same, ask yourself this question "what's the best and easiest possible way to generate significant profit from your investment"? The answer is "compounding". Now, what element helps investors to build compounding? Well, you might have learned this in your high-school days but the time affects your compounding rate.
As you stay invested in mutual funds and other investment options, your compounding interest increases. To put it in simple terms, the longer your investment period, the better the profits you can expect. The most important factor that plays a major role in increasing your earnings is time.
We all know that mutual funds are subject to market risks, which means you cannot control their movement. The only thing you can do is expect good. The ups and downs you get to face during the investment period are sufficient to disturb your confidence and encourage you to draw the money at the earliest possible time. As a result, you end up withdrawing all your investments. It is important to note that these decisions can have a negative impact on your overall investment portfolio.
Equity profits generate in small portions. That’s the reason why experts recommend a longer investment period for the beginners as well as experienced professionals. Sure, equity investment carries a significant amount of risk. But, this is the only form of investment that ensures a higher profit at the end of the maturity period. You cannot expect your equity investment to witness a rise within the first few months. As mentioned before, the equity gains are generated in small portions.
Let’s say you withdraw your investment from equity just because you don’t find it a lucrative option or you don’t witness some major gains. All of a sudden, the market condition improves and people who stayed invested enjoy larger chunks of profits. One wrong decision and your entire investment portfolio disturb. Not only that, but you also miss out on a major opportunity of earning handsome profits.
If you are new to the investment realm, note that the total time of investment in equity markets can be anywhere between 5-10 years. In these 10 years, your equity shares will experience a major gain period that lasts for 30-40 days. But no one knows which one or two months period in the 10-year duration will it be. Everyone waits for these 30-40 days when they'll be able to make high profits from their equity investment. The only possible way to leverage this opportunity is to wait and stay invested until the market condition works in your favor.
Not every investor can stay invested for 10 years. The number of years you should stay invested depends on certain factors such as your risk appetite, profit expectations, and other such factors. If you could bear high-risks than equity investment is the best option. On the other hand, investors with little to moderate risk appetite should choose short-term or medium-term investment opportunities. Let’s learn about each type of investment on the basis of their time period in brief:
Immediate Term: If you have immediate-term goals, which is for less than a year, then money market instruments can serve as the best investment objects. Not only are they less volatile, but they offer great liquidity. As compared to the equity investments, money market instruments can prove the best option for investors who are not willing to take high risks.
Short-term: If you are planning to stay invested for more than a year yet less than 3 years, you are investing in short-term investment options. Sure, the risk is relatively higher than the money market instruments but it also offers a good rate of return. Short-term investments are a combination of debt securities, equity, and money market income funds.
Medium-term: Investment made for a period of 3 to 8 years falls in the category of mid-term investment. Luckily, investors get to pick from several medium-term investment options such as bonds, index funds, balanced mutual funds, and so on. Experts recommend partial debt security investment to stabilize your risk and ensure good returns.
Long-term: If your investment period exceeds 8-year duration, then it falls in the long-term investment category. These investment options are preferred by people who have long-term financial objectives such as building a house, children's education, marriage, and so on. The risk involved is quite higher, but it offers a higher rate of returns.