The one principle you need to follow to really benefit from mutual fund investments

This is contrary to what is understood to be the right investment horizon for equity mutual funds. In the long term, the risk of volatility is tackled better and the returns obtained are more promising.

What prompts investors to exit early

A possible reason could be investors treating their mutual fund investments just like fixed deposits. An investor in fixed deposits usually stays invested in the instrument for a year. After the lowering of interest rates in fixed deposits, many investors shifted to mutual funds, but followed the same approach as conventional assets.

Also, before choosing any investment instrument to park money, it is important to understand its features. The lack of awareness about exit loads and capital gains could be other reasons that may have driven the investors to exit early from equity schemes.

Usually, equity schemes are not recommended for short-term investors, because of the market risk associated. In case they do exit from equity schemes after a short investment duration, it may result in loss of money.

How long-term equity investment helps

It is advisable for investors to stay invested longer than five years in equity mutual fund to obtain substantial returns. Equity markets can be erratic in the short-term, and therefore the returns may be unsatisfactory. In the long-term, the stock market performs in line with the growth trajectory of the economy. So if you invest in the equity mutual fund with a long-term horizon, there is lower chance of volatility and higher chance of inflation-beating, high returns.

Thus, it is crucial to diversify your portfolio and review your investment regularly based on market movements. This will help you mitigate the risk associated with the equity market. Another way to tackle volatility is by investing through SIP. It allows you to take advantage of the rupee-cost averaging in an automated manner. SIP ensures that you buy more units of a fund when the market is low and less units when the market is high. This reduces your cost of investing while increasing your returns.

However, avoid investing all your money in the same fund and the scheme. You can always invest in ultra-short funds and balanced funds for your short-term needs.