The importance of long term investment for a financially secure future can never be overemphasized. However, most of the time, people don’t know which long term investment options are best for them. This article describes two different types of mutual funds for long term investment that combine high returns with low risks.
A balanced fund, also known as a hybrid fund, is a mutual fund that invests your money in a combination of entities, such as common stocks, preferred stocks, short term bonds, and long term bonds. In this way, it fulfills the objectives of both, growth and income. While growth is ensured by the investment in stocks, the income objective is achieved by investment in bonds. Because of diversified holdings, it is also able to manage down slides in stock market without suffering too much loss, and is thus comparatively risk free.
In general, balanced funds keep an equity-debt ratio of 60:40. This means that they invest about 60% of their corpus in equity and 40% in debt instruments and cash equivalents. That is how they combine the growth of equity (shares) with the stability of debt instruments (fixed income investments, such as bonds). Further, they keep re-balancing their portfolio so that the overall asset allocation does not get disturbed. This means that they keep en-cashing the profits earned in the stock market and investing it in low risk instruments to maintain the 60:40 ratio. Thus your asset mix is kept properly balanced without forcing you to get into the hassle of re-balancing yourself.
However, while balanced funds minimize risks when the market is in down-slide, they obviously can’t provide as much growth as an all stock fund when the market is bullish.
An income fund is another type of mutual fund that invests its corpus in fixed income securities, like bonds, corporate debentures, and government securities. It provides you with a regular income on a monthly or quarterly basis.
Mutual funds eliminate one of the biggest problems of other long term investment options, that is liquidity. You can exit from a mutual fund anytime you want, and get all your money at short notice. Income funds combine this advantage of mutual funds with good returns and stability.
They ensure that most of the bonds they invest in are of investment grade while others have a credit quality that can assure the protection of capital. Thus, they rate quite low on risk and default.
Most well managed income funds offer higher returns than either company or bank fixed deposits. While it is true that due to current recession, their returns during last year were below average, in the long run income funds do better than bank fixed deposits. The chart given below will make it clear:
Returns of Income Funds and Fixed Deposits in Short Term and Long Term
|Income Fund/Bank FD||1 Yr||3 Yrs||5 Yrs||Since Inception|
|Birla Sun Life Income Plus||1.86%||11.54%||8.6%||10.43%|
|Canara Robeco Income||2.83%||13.6%||10.03%||9.24%|
|State Bank of India FD||6.00%||6.50%||7.25%||–|
Now that the markets have again started doing well, the future prospects for income funds are definitely bright and you can unhesitatingly choose them for assured income in the long term.