Investing in mutual funds is a very popular way to build wealth. It works particularly well when the funds you select are in alignment with your long-term financial goals. Long-term mutual funds provide an effective way to leverage the power of compounding, and they provide steady returns over time.

In this article, we take a look at the best long-term mutual funds to invest in, what to look for when selecting these funds, and how they compare with short-term options.

If you are looking for a safe investment option, you can consider fixed deposit. They offer guaranteed returns and a fixed interest rate throughout your investment tenure.

• Long-term mutual funds benefit from compounding and generate steady growth over extended periods.
• They often carry lower risks when held for the long haul, making them ideal for growth-hungry investors.
• These funds are suitable for many goals, like home buying, retirement corpus building, or other future financial goals.
• Understanding your financial objectives helps you select between long-term and short-term mutual funds.

Long-term funds are designed to deliver consistent returns over an extended period, which is usually five years or more. They are best for investors aiming for gradual growth rather than quick gains. Over time, these funds benefit from compounding returns and smooth out short-term trends, which enables investment to grow exponentially. With a long-term horizon, market fluctuations have a lesser impact on the overall performance, which makes them a safer bet for investors who are fine with short-term volatility.

In contrast, short-term funds cater to people who want quick returns or need to access their money within a smaller time frame. They are typically invested in less volatile assets like bonds, but also offer lower returns as a result.

Understanding the difference between long-term and short-term mutual funds is helpful in deciding which option works better for your financial goals. Here is a quick comparison:

• Risk factor: Long-term funds are usually more volatile and offer higher returns, whereas short-term funds are generally safer but provide lower returns.
• Investment horizon: Long-term mutual funds are designed for investors with a 5+ year horizon, whereas short-term mutual funds are suited for those people who may need quick access to their money in a year or two.
• Types of assets: Long-term funds focus on equity, growth stocks, and high-risk sectors, while short-term funds lean towards bonds and money market instruments.
• Returns: Long-term mutual funds can yield significant returns due to equity exposure and compounding, while short-term mutual funds provide stable but lower returns, focusing on capital preservation.
• Volatility: Long-term investments may experience more fluctuations but are balanced over time. Short-term investments, on the other hand, usually remain stable with little market-related movement.

• Compounding power: Over time, the interest or dividends earned on long-term investments compound, which delivers exponential growth in returns.
• Higher returns: With exposure to equities and high-growth sectors, long-term mutual funds can offer more significant returns compared to other asset classes.
• Lower impact of market volatility: Short-term fluctuations have less of an impact over longer periods. Long-term funds, therefore, cushion against market downturns.
• Ideal for retirement planning: These funds can form a crucial part of a retirement portfolio and ensure financial security in later years.

When selecting a long-term mutual fund, here are some of the factors that you should pay attention to:

1. Risk tolerance: Assess your risk appetite before choosing the fund. High-risk funds offer greater returns but come with higher volatility, while low-risk options provide stability but yield lower returns.
2. Expense ratio: Look at the fund's expense ratio as it impacts your net returns. Funds with lower expense ratios are more cost-efficient in the long run.
3. Historical performance: While past performance does not guarantee future results, it provides an insight into how the fund has weathered through different market conditions.
4. Fund manager expertise: The experience and expertise of a fund manager can make a big difference in how well the fund performs.
5. Financial goals: Align the mutual fund with your long-term goals like retirement, home buying, or the education of your child.

You can consider investing Bajaj Finance Fixed Deposit. With a top-tier AAA rating from financial agencies like CRISIL and ICRA, they offer one of the highest returns, up to 8.60% p.a.

Here are some of the popular long-term funds that you can invest in this year.

• Bandhan Infrastructure Fund
• ICICI Prudential Infrastructure Fund
• Nippon India Small Cap Fund
• DSP T.I.G.E.R. Fund
• Nippon India Power & Infra Fund
• SBI PSU Fund
• Invesco India PSU Equity Fund
• Canara Robeco Infrastructure Fund
• Invesco India Infrastructure Fund
• Franklin Build India Fund

Investing in long-term mutual funds is a powerful way to build wealth and achieve your financial goals. Long-term funds have shown strong performance over the years, making them an attractive option for people with a longer horizon.

By carefully analysing key metrics of each fund, you can make informed decisions that align with your risk tolerance and financial objectives.