Does Long-Term Investment in Mutual Funds Mean Less Risk?
When it comes to mutual fund investing, you have a lot of options available. There are funds according to your needs and time horizon. There are funds for short-term as well as long-term.
But just like all other investments, mutual fund investing also carries risk. It's not free of risk. This is because the funds here are invested in various financial instruments like equities, bonds, government securities, etc. and are affected by markets, government policies, etc.
As compared to short-term investments, long-term investments are less risky. In the long term, the funds go through different market cycles. In this article, we will understand why long-term investments are less risky.
How Mutual Fund Investments Are Risky for Investors?
Mutual fund investments are quite risky. Now let’s understand how the risk is involved in mutual fund investments. There are two basic aspects i.e., ability to take risks and your tolerance towards the risk.
The ability to take risks means that is it possible for you to take risks associated with the investment. If you are rich, you may be able to afford to take risks. But on the other hand, if you are not so rich, you can’t afford to take risks.
After this comes the tolerance of risk. This means the willingness to take risks. Let’s understand this. A wealthy person may be able to afford it but then also is not willing to encounter any risks. On the other hand, there may be a person who is financially not so great but is ready to take risks.
So, these two aspects determine the risk factor that investors are ready to take. A proper balance needs to be maintained between both aspects of risk.
Conclusion:
Long-term investment in mutual funds reduces the risk as they give higher returns, is a tool against hedging and has a compounding benefit. It can also help you achieve long-term goals like retirement planning and child education. Yes, but you need to be patient and stay invested to get the maximum benefit of long-term investing in mutual funds.
