Why is Knowing Your Investment Horizon Necessary Before Investing in Mutual Funds

Don’t you think nurturing a plant from a tiny seed is quite an experience? It’s intriguing how some people stick with it until it grows into something substantial, while others lose interest along the way. Moreover, the variety of plants in terms of growth timeline is fascinating. I mean, the difference between harvesting mustard greens in just two weeks compared to waiting a whole month for spinach highlights how unique each plant’s journey is. Again, don’t worry; this blog post is not about plants. However, I want to know if planting a seed and waiting for it to grow bores you. Because if it does, then you should know that mutual funds are similar to growing plants. Yep! Patience is definitely the name of the game when it comes to growing plants or attaining probable mutual fund returns.

It’s not a quick process; seeking profitable returns from your investments demands time and care, much like plants. Therefore, if you want to advance your wealth but are not well-versed in crucial terms like investment horizon, don’t worry. I, Janhvi Dhuria, will simplify it for you.  

Overcome Your Hesitations to Attain Financial Success

Before I start on the investment horizon, have you ever wondered why it is so hard to invest for a longer period in mutual funds? I have seen people contemplating whether to invest in mutual funds or not and figuring out the returns they will attain, but I could never understand why. You invest a specified amount in FDs and PPFs for ten or fifteen years, then sit back and relax. Besides, the returns you get on FDs range from 3-8%, and mutual funds can give you a lot more than that, so why are you letting your short-term hesitations hold you back from attaining long-term wealth growth?

Most people don’t address this question because they know they can liquidate their assets whenever they want. However, when it comes to FDs and PPFs, people know they will be able to redeem their funds after a specified period. But do you have any idea about the money you can accumulate if you leave your investments for ten or fifteen years? Those who have already done it know you can do wonders if you stay invested in mutual funds, don’t you, friends? Yep! The more time, the better the returns.

Why is Figuring Out Your Investment Horizon Important?

Now, you might be wondering, “What’s the big deal about knowing my investment horizon?” Trust me, it’s a make-or-break factor when it comes to choosing the right mutual fund. In fact, let me show you a case study to put things into perspective.

I’m sure you remember our friend Mr. John Doe. Well, it turns out that he has a sister, Jane Doe, who had quite an investment experience.

Back in 2022, Jane made an investment of Rs. 10 lakhs based on the stellar returns of the Nifty IT Index in 2021. She was excited about the prospects and eagerly awaited the outcome. However, she made a mistake by not knowing her investment horizon and investing solely based on the past year’s returns. As a result, she faced a negative return of -0.48% by the end of December 2023. 

On the other hand, John has been investing for quite a few years and always invests in a strategic and well-planned manner. He adopted a more prudent approach and invested the same amount of Rs. 10 lakhs in 2015, adhering to the ideal investment horizon for IT Funds, which is considered to be 6 years. Despite facing market fluctuations, John remains invested and reaps the rewards, with a commendable return of 13.41%.

Now, here’s where it gets interesting. Back in 2015, when John was about to start his investment, he asked Jane to do the same as he had consulted his financial expert and had an idea that their investments would give them very good returns. But, unfortunately, Jane didn’t pay heed to his suggestion, stating that she had a lot of time on her hands and didn’t need to start investing just yet. And the rest, as they say, is history.

This goes to show that investing is not just about jumping on the bandwagon based on past returns, but rather, it requires a well-planned and strategic approach. So, if you’re planning to invest, make sure to consult with an expert and have a clear understanding of your investment horizon.

How Can Knowing Your Investment Horizon Give You the Upper Hand?

If you’re planning to invest for the short-term, let’s say, to buy a bike or a laptop, you may look for quick returns. In such cases, debt funds should be your go-to option, which can give you returns of around 8.5%, with negligible chances of getting negative returns. On the other hand, a long-term investment horizon can give you the opportunity to take higher risks and invest in equity funds, as having a longer investment horizon would mitigate the risk.

For example, if you’re saving for your child’s college education, which is still years away, you may opt for a long-term investment in mutual funds that can offer higher returns over time. Knowing your investment horizon is crucial, as it can help you achieve your financial goals and dreams. It can give you the confidence to make the right investment decisions that align with your financial objectives. So, take the time to understand your investment horizon, and start investing today!

So what is the right approach? Let’s understand that with an example

Imagine this: every month, you have been setting aside Rs. 2,500 to purchase a new phone. Finally, after a year of squirrelling away, you have a neat pile of Rs. 30,000; however, the phone you have been eyeing costs Rs. 20,000. So, what will be your next move? Will you rush to buy it or keep hoarding those savings? Let’s be practical here. You wanted that phone, so you will obviously grab it!  

What I am trying to put up is that your financial goals determine your stay in the market. Therefore, comprehending your long-term and short-term goals is crucial. The idea is to remain invested to attain probable returns without losing sight of what you want—your financial goals. 

To Wrap Things Up

Now that you’ve come this far, do you understand the importance of knowing your investment horizon? Let me reiterate one last time to wrap things up.

Understanding your investment horizon is a crucial step in building a successful investment portfolio. It allows you to make informed decisions and gives you the upper hand in achieving your financial goals. As an investor, it is crucial to refrain from chasing recent high returns and instead focus on aligning your investment strategy with a well-defined horizon, taking into account the inherent volatility of the market. This approach can contribute to more informed and successful investment decisions. So, take control of your financial future today by defining your investment horizon and investing wisely. So, are you ready to take control of your financial future and start your investment journey? Because the possibilities are endless! 

Please share your thoughts on this post by leaving a reply in the comments section. Also, check out our recent post on “Compounding Miracles: Sip Investing as the Secret Sauce to Financial Success” 

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Disclaimer – This article is for educational purposes only and by no means intends to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the offer document carefully before investing.