Mutual Funds: Why Time Horizon Matters

Mutual funds are a popular investment tool. In a mutual fund scheme, an investor should ideally average out every year’s widely fluctuating returns to get stable returns in a longer period. 

In a mutual fund, as an investment product, an investor needs to be invested for an appropriate period. 

This way, having the right time horizon not only helps you earn better returns but also reduces the risks involved in the investments. These risks are related to volatility in the investment performance or also the erosion of the invested capital. 

If an investor is invested in a mutual fund for a longer period, then you may witness a few years of low or negative returns, followed by years of decent returns. Thereby, landing you having an average reasonable return over a long period. This is why an investor is required to stay invested for a longer duration. An investor can average out every year’s widely fluctuating return and get a stable long-term return. 

However, every mutual fund category might not have the same kind of time horizon requirement or need. As an investor in a mutual fund, it is important to figure out, which category you wish to stay invested in. For instance, in an equity and balanced mutual fund, it is better to have a time horizon of at least five to seven years. Similarly, debt funds can have a time horizon of anywhere from 1-5 years. 

As an investor, apart from the category of the mutual fund, it is also essential to consider the time horizon to stay invested.