How long should you stay invested in index funds? This is the answer

Many mutual fund houses are now coming up with new index fund launches considering more investors are showing interest in passive fund investments. This is all the more important as constant corrections across all sectors have prompted many investors to refrain from choosing between stocks and mutual funds and let their investments yield earnings in sync with the market.

Viral Bhatt, Founder, Money Mantra, said, “Parking money in index funds can provide several benefits to investors, including:

• Diversification: Index funds provide broad market exposure by investing in a basket of stocks that track a specific index. This helps to spread risk across many companies and industries, reducing the impact of any one company's performance on the overall portfolio.
• Consistent Performance: Index funds tend to closely track the performance of the underlying index, providing a relatively stable return that is less likely to be significantly impacted by the performance of any one company.
• Ease of Investment: Index funds are easy to understand and manage, making them an attractive option for investors who do not have the time or expertise to actively manage a portfolio of individual stocks.”.

While we are aware of the benefits of putting our money in passively managed funds, how much to invest and for how long depends entirely on your financial goals. However, going by the returns of many funds since their launch, it makes sense to stay invested in index funds for a prolonged period or continue to park earnings regularly till they reach their financial goals.

How long to stay invested in index funds?

How do you define and decide the investment horizon for index funds? Though your investment tenure must depend on your financial goals and at what age you visualize yourself as financially independent, it makes sense to learn about the returns in the past few years.

An evaluation of the mutual fund returns over a period underlines how returns tend to be consistent if investors continue to hold their investments. Considering how equity mutual funds are prone to fluctuations and volatility in the short run, continuing to hold them for a decade or more helps, unless the market has been exceptionally bullish for a period, thus, helping investors to reach their financial goals early in life.

How to decide when to exit index fund investments?

Before you pump in your earnings in an index mutual fund, you must be willing to learn how and when to exit such investments. To preserve capital, you should plan to systematically dispose of your investments as you get closer to your goals. It may be useful to be aware of the tax implications and surrender charges associated with the redemption of mutual fund investments.

Investors must not decide to exit their index funds suddenly. Exiting long-term mutual fund investments begets a well-conceived plan that must be made just when you are nearing your financial goals. Having long-term goals means that you must initiate an exit strategy before reaching your investment goals. This is because as you get closer to your long-term goals, you must consider shifting your investments from riskier asset classes to safer investment opportunities to preserve your wealth.

You must refrain from exiting your mutual fund investments all at once. This means that you should gradually shift your investments from risky investments to safer options. 

CA Kanan Bahl, a finance educator and growth consultant, says, “The investment in any equity instrument should not be done unless you have an investment horizon of at least four to six years. While markets have a proven track record of beating most of the regulated asset classes, they can be volatile. If you are investing for any specific goal, say, child's education or retirement, then consider exiting the investment one to two years prior to the date when funds will be required. This will help you in keeping your funds safe from volatility.”

Index investing is one way of earning enviable returns from the market. However, this mandates patience, consistency and due diligence in investing.