A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
Which mutual fund should I choose for long-term investments?
Long-term investments aim to finance distant future goals, such as university education, housing, retirement, etc. So, choose a fund that is suitable for wealth creation. Long-term goals have a horizon beyond 10 years, and capital-oriented schemes (>=65% equity allocation) are one of the best long-term investment options. Equities have higher growth potential although more volatile in the short term than hybrid and debt funds. A well-diversified equity fund is more likely to offer stable long-term growth.
Look for funds with higher risk-adjusted returns (close ratio), i.e. funds that offer higher returns for the same level of risk. Expense ratios affect long-term fund returns due to the compound effect. Choose a fund with a lower expense ratio, which means more funds are available for investments that can increase the fund’s return over the long term. Check the fund manager’s track record to see if they have performed well. Look at the type of funds he has managed and whether his funds have consistently outperformed peers. You can also look at funds with a higher beta for long-term investments as they tend to gain/lose more than the market, but the markets usually go up. So a higher beta would mean that your fund will earn more than the market in the long run.