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How long is long-term in mutual fund investing

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MUTUAL fund investors are finding out that the term long-term has undergone a change of meaning.

 

The usual advice to investors is: invest for the long term so you may derive better returns from equity-oriented instruments.

However, this often does not turn out that way as far as the total time period is concerned. This is why an individual must make sure that he has a fair idea of the situation before acting.

Normal expectation:

Usually, when you refer to a long-term investment you mean three years or so.

That is how people, including advisers as well as distributors, refer to the context of mutual funds. This is longer than the normal time period of several months or a year or two that one might expect for an investment. There is a certain expectation that comes with looking at this time period and this is that there would be good returns that one would normally expect with an equity investment would be witnessed in the portfolio. The normal thing is that in the short time period of a few months or even a couple of years, there could be tough conditions in the equity whereby the returns might not be visible but by the time the period has expanded to more than three years the real benefit of investing in equities would start being seen.

Poor conditions:

 The situation for many investors is extremely critical at this juncture because their entire plans have been turned upside down. On one side they started investing during tough times through a systematic investment plan and this has gone on for quite some time which for many people is around four to five years. The problem is on the returns side where many are under water, which means that they are actually losing money while those in the positive territory are just in the 2-3 per cent annual range. The feeling is that of disappointment wherein even after waiting for a long time period and continuing to invest there is no result that is actually being witnessed and at the same time there is also no surety as to when the situation could also change.

Time Revision:

Considering the actual position individual investors will have to ensure that they are making the right decision. The way to go about this process is to start at the basic level and look at the expectations that have been built in. The time period of three years that most people consider as long term is the one that needs to be revised and hence there has to be work on this particular front. The real long term that many investors look towards is not just a few years but it can be a decade or more because equity cycles can also last this long. The real wealth that is built up in equities comes over this longer time period and hence this has to be the end goal of the individual.

Most people do not venture this far or they actually do so only when they realise that their existing plans are not working that they decide to remain invested for a longer time period. However, one has to understand that in the field of equity and equity mutual funds there is nothing that is certain and there could be long time periods when the position is not working out. The real work lies in understanding that the period could extent for far longer than what one can have expected.

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