At the Financial Geek, I tend to stress a strategy of long-term investing. Putting your money to work and letting time and compounding do most of the heavy lifting. One popular long-term investment asset is the mutual fund. They provide instant diversification, are easy to contribute to, and a fund manager does all of the work for you. It doesn’t get much easier than that! But I get a lot of questions about what a long-term timeframe is. How long should you invest in mutual funds before selling? I did some research and here’s what I found.

To be honest, there is no single answer to this question. Investing is such a personal thing and everybody has different goals. If you want to hold your mutual funds for the long term, you are probably looking for at least ten years to see any meaningful returns.

Whether that fits with your investing goals and horizon is up to you. Some investors will lock their mutual funds in until retirement, while others will cash it out and trade those funds for a quick profit. In this article, I’ll touch on the benefits of holding mutual funds for years, tax implications, and whether or not you should even be investing in mutual funds in the first place!

How Long Should You Invest in Mutual Funds?

I don’t want to speak for everyone, but mutual funds are generally classified as long-term investment assets. Everyone has a different definition of what long-term even means. Some places will tell you that long-term investments are anything held for more than one year. 

For a lot of investors, that probably seems a little short. Many of us look at investors like Warren Buffett and think that holding stocks or funds for decades is the right answer. It can be, but let’s also remember that Buffett can afford to tie up his money in long-term investments. After all, Buffett kind of runs his company Berkshire Hathaway like a hedge fund. 

Again, I will reiterate that there is no correct answer to this question. The correct response is however long it takes you to reach your investment goals. 

Is it Good to Hold Mutual Funds for the Long Term?

Yes, it is. For the most part, it is good to hold any investment assets for the long term. This includes individual stocks, mutual funds, and Exchange Traded Funds or ETFs. Historically speaking, the longer you hold these assets and are invested in the markets, the better your returns will be. 

Mutual funds have some advantages over individual stocks. For one, they are not affected by the day-to-day volatility of the market like individual stocks are. The ceiling for your gains might be capped but so too is your floor. Mutual funds are an easy way to add instant asset diversification to your portfolio. 

When holding mutual funds for the long term, you are banking on the fund outperforming the market. Mutual funds are actively managed by professional fund managers. Letting them do the hard work for you is one benefit of holding mutual funds for years. Your investment can grow even more if you reinvest any dividends that might be paid out by the stocks in the fund. 

What are the Disadvantages of Holding Mutual Funds?

I like to give you guys the complete picture, so let’s talk about some of the disadvantages of holding mutual funds. First, the number one disadvantage of mutual funds is their high management fees. These fees will vary depending on where you live. For example, in the US the fees are typically between 0.50% and 1.0%. But for the neighbours up North, Canadians will pay upwards of 2.0% in fees.

What do fees mean for mutual funds? In this case, the percentage is an expense ratio. This means that for every $1,000 you have invested, you will pay $10 per year if the expense ratio is 1.0%. Compare this to ETFs which can have MERs that are as low as 0.06%. It might not seem like much, but over years or even decades, the fees will add up!

Since mutual funds are actively managed, you are at the mercy of the fund manager. It isn’t easy to actively manage a fund and beat the market. This is why many people, including Buffett himself, believe that owning low-cost index ETFs is the best way to build your long-term portfolio. 

Related Financial Geek Article: How Exactly Do Index Funds Make Money?

Are Mutual Funds Really Worth It?

For many people, mutual funds are worth investing in. Why? As I already mentioned, they are easy to understand. Most mutual funds come with a minimum investment of just $50.00 that you can contribute to your investment whenever you want. It is simple, low-touch, and will grow your money over time.

In my opinion, it doesn’t get any easier than that. All you have to do is decide how long you should invest in mutual funds. The answer will always depend on what you want to get out of your investment. Will it help you buy a house? Then hold the mutual fund until you need your downpayment. Is it for retirement? Then hold the funds until retirement. It’s that simple! 

The Bottom Line: How Long Should You Invest in Mutual Funds?

If you haven’t realized it by now, I will never give you financial advice. Investing in mutual funds for the long term is a personal decision. As I said, everyone has their own investment goals. Hold your mutual funds for as long as you need them. Do not be surprised if you do not see any meaningful appreciation if you only hold the mutual funds for a few years though. The most important ingredient for capital growth is time. The longer you hold your mutual funds, the better your returns will be!

Thanks for giving this a read today, I hope it helped!

Geek, out.