What is meant by long term and short term mutual funds?

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Various mutual fund schemes are available in different categories, such as equity, debt, and hybrid mutual funds, including numerous mutual fund schemes. These include large-cap, small-cap, index funds, short-duration funds, long-duration funds, and more.

Short-term mutual funds are typically debt mutual funds that invest in short-term and money market securities. The maturity of these funds, meaning the portfolio duration, is usually between 1 to 3 years.

Now, if you consider what someone’s goal might be for a three-year short-term investment. It could include things like saving for a wedding, starting a new business, going on a holiday, or dealing with a medical emergency. When it comes to the category of debt mutual funds, there are various funds, including liquid funds, low-duration funds, long-duration funds, money market funds, gilt funds, credit risk funds, and 16 other types. Long-term mutual funds are typically equity mutual funds that primarily invest in the stock market.

Market experts recommend having a minimum investment horizon of at least three years for these funds. If the fund is performing well, it can be extended for up to 10 years.

In the equity mutual fund category, there are 11 types of equity funds. Long-term mutual funds help you achieve your long-term goals. Such as higher education, buying a house, going on foreign trips, and so on.

Due to the benefits of compounding, long-term mutual funds can offer higher returns, but you should also keep in mind that higher returns come with higher risk.

Several types of equity mutual funds, like small-cap funds, equity-linked saving schemes, sectoral mutual funds, come with higher risk.

However, apart from the choice of long-term or short-term in a fund, there are several other parameters to consider. For example, how taxes apply to debt and equity funds, the fund’s historical performance, fund management quality, and fund ratings, among others.

The founder of Investography and CFP Shweta Jain says that in equity, long-term is usually considered to be 5 to 7 years. However, it’s not necessary to follow this rule blindly. Also, assess the scheme’s performance, fund management, and fund house to ensure it aligns with your goals and expectations.

Mutual fund investors should always invest in long-term and short-term funds according to their needs. Debt funds can be good options to protect the portfolio from the ups and downs of the stock market.

In any portfolio, there should not only be high-risk equity mutual funds.

Instead, debt funds should also be included. In comparison to equity funds, debt funds can provide quick access to cash when needed. In addition to this, investors can also invest in hybrid mutual funds that invest in both debt and equity. These are suitable for a time horizon of 3 to 5 years. Don’t become overly confident when investing in long-term funds. Review the funds periodically to see which one is performing well and which one is not.