How Long Should I Stay Invested in a Mutual Fund - Expert Answer

A question we hear constantly in our Belong WhatsApp community: "I started a SIP six months ago and it's down 8%. Should I stop?"

The short answer: No. Six months is far too short for equity funds.

But the real answer depends on your fund type, your goals, and what "staying invested" actually means for your specific situation. 

Most NRIs we work with make timing decisions based on emotion rather than strategy. This costs them lakhs over time.

This guide covers exact holding periods by fund category, when you should genuinely exit, tax implications that change based on how long you hold, and what returning to India means for your investment timeline.

The Quick Answer: Ideal Holding Period by Fund Type

Different funds serve different purposes. Matching your holding period to your fund type is the single most important decision after choosing the fund itself.

Equity Mutual Funds need 5 to 7 years, as it gives time for growth and handles market ups and downs. 

Debt Mutual Funds need 1 to 3 years, since it becomes suitable for low-risk, short to mid-term goals. 

Hybrid Mutual Funds need 3 to 5 years to provide balanced exposure to both debt and equity investments.

👉 Tip: Your holding period should always be longer than the exit load period. Most equity funds charge 1% exit load if you redeem within 12 months.

Why Equity Funds Need 5-7 Years Minimum

In the case of equity mutual funds, the longer you invest, the greater the chance of better returns. 

Most attractive investment opportunities require a gestation period - the time it takes for the capital to take root and deliver the fruit of appreciation.

Here's what actually happens over different timeframes:

1 Year: High volatility, unpredictable returns. Markets can swing 20-30% in either direction. Your returns depend heavily on when you entered.

3 Years: Some smoothing effect, but still vulnerable to single bad year. The 2020 crash would have devastated a 3-year investment made in 2017.

5 Years: Most market cycles complete within this period. Historical data shows the probability of negative returns drops significantly after 5 years.

7+ Years: Multiple market cycles absorbed. Compounding starts showing real impact. Analysis of data suggests that 7 years is the magic number for long-term equity investing.

Studies conducted demonstrate that the risk of loss on investments undertaken for more than 4 years is negligible. 

Conversely, the risk of loss is higher in the short-run due to the possibility of intense market volatility.

Consider the 2008 financial crisis. Investors who stayed invested for 7 years from 2008 saw their portfolios not just recover but multiply. 

Those who panicked and exited locked in their losses permanently.

Learn more about choosing equity funds in our guide on large-cap vs mid-cap funds.

The Minimum Holding Period: What SEBI Says

The minimum holding time requirement applicable to mutual funds is one day. This is because the fund determines the applicable purchase price of the fund's units/shares on a daily basis.

Technically, you can exit most open-ended funds the next day. But "can" and "should" are very different.

There are open end schemes in India with daily NAV, in existence for more than 20 years. 

And there are investors too who have stayed invested for that tenure! As long as the schemes continue in operation and offer a NAV based sale and purchase price, investors can choose to continue to stay invested.

The only fund with a mandatory lock-in is ELSS, which requires a minimum 3-year holding period. 

This lock-in applies to each SIP installment separately. So if you started a monthly SIP in January 2024, your January investment unlocks in January 2027, February's in February 2027, and so on.

Explore tax-saving options in our ELSS funds guide for NRIs.

Tax Implications: How Holding Period Changes Your Tax Bill

Your holding period directly affects how much tax you pay. This matters even more for NRIs due to higher TDS rates.

Equity Funds (post July 2024 Budget):

If you hold the units of equity mutual funds for more than 12 months, the arising long-term capital gains (LTCG) are taxed at 12.5%, with ₹1.25 lakh annual exemption across all equity investments. 

If you redeem your units within 12 months, the arising short-term capital gains (STCG) are taxed at 20%.

Debt Funds (post 2023 changes):

For debt funds, the gains are taxed at your income tax slab rate, regardless of holding period. They are added to your total taxable income and then taxed as per your tax slab.

This change removed the indexation benefit debt funds previously enjoyed. Now, debt fund gains are taxed at your slab rate whether you hold for 1 year or 10 years.

Hybrid Funds:

If equity portion is 35–65%: Held ≤24 months → STCG taxed at slab; 

Held >24 months → LTCG at 12.5% (no indexation). 

If equity portion is ≥65%: taxed like equity funds.

👉 Tip: For equity funds, always try to hold beyond 12 months to benefit from the lower LTCG rate. The 7.5% tax saving (20% STCG vs 12.5% LTCG) on ₹5 lakhs gain means ₹37,500 saved.

Understand all tax implications in our detailed guide on mutual fund taxation for NRIs.

SIP Duration vs Investment Holding Period: They're Different

This confuses many investors. The holding period of your investment can be different from the period of your SIP investment. 

For instance, you may want to stop running your SIP (making fresh contributions) after 5 years but remain invested for the following 10-15 years.

Think of it this way:

SIP Duration: How long you keep adding new money (3 years, 5 years, 10 years)

Holding Period: How long your money stays invested before you withdraw

You could run a SIP for 5 years, then stop contributing but leave your accumulated corpus invested for another 10 years. 

Halting or stopping your SIP investments does not require you to pull out of the market immediately. You can still remain invested and let your investment grow under the power of compounding.

This strategy works well for NRIs who might face income fluctuations or plan to return to India. You stop fresh investments but let existing money compound.

Compare investment approaches in our guide on SIP vs lump sum investing.

When Should You Actually Exit a Mutual Fund?

Not all exits are panic-driven. Some make strategic sense. Here are legitimate reasons to redeem:

1. You've Achieved Your Goal

When the objectives of your investment have been reached, it may make you want to advance your exit. The corpus of fund sometimes exceeds expectations.

If you invested for your child's education and the amount is now sufficient, redeem it. Don't get greedy and risk the goal you've already achieved.

2. Consistent Underperformance

You can consider halting your SIP and redeeming units if the fund you've invested in underperforms for an extended time period. 

But remember to compare the performance of the mutual fund against its peers and benchmarks over a substantial period of 3-4 years to make an informed choice.

Key word: 3-4 years. Not 6 months. Not 1 year. One bad quarter or even one bad year doesn't signal a problem. Consistent underperformance against both benchmark and peers over 3+ years does.

3. Fund Strategy Changed

Sometimes fund managers change their investment approach. A fund that was primarily large-cap might start taking mid-cap bets. If the new strategy doesn't align with your goals, exiting makes sense.

4. Life Events Requiring Liquidity

Medical emergencies, job loss, or urgent family needs are valid reasons. This is why having an emergency fund in liquid assets is crucial before committing to equity investments.

5. Rebalancing Your Portfolio

If your equity allocation has grown to 80% of your portfolio when your target is 60%, selling some equity funds to rebalance is prudent risk management.

Learn about avoiding common pitfalls in our guide on mutual fund investment mistakes.

When You Should NOT Exit

Markets dropped 10% this month. Should you exit? No.

Your friend says a different fund gave 40% returns last year. Should you switch? Probably not.

Markets go through ups and downs all the time. If you panic and take out your investment during a fall, you may lose out on future gains. A longer holding period allows your fund to recover and perform better over time.

Here's what the data shows: Investors who stayed invested through the 2020 COVID crash (38% drop) saw their portfolios recover within 8 months and gain over 100% by September 2021. Those who exited in March 2020 locked in 30-40% losses.

Avoid exiting due to short-term market volatility, news headlines creating fear, chasing past performance of other funds, or minor underperformance (less than 2-3 years).

Avoid halting your SIPs when the market turns volatile. Exercise the option only if you experience an unavoidable liquidity crunch, income strain, achieve your set goal, or the fund underperforms consistently.

👉 Tip: It's recommended to review your mutual fund returns at least once a year. This will help you understand whether your investment aligns with your financial goals. But reviewing doesn't mean reacting to every dip.

Holding Periods for Specific Goals

Match your investment horizon to your goal:

Emergency Fund (0-1 year): Liquid funds or overnight funds. You need instant access with minimal volatility. Learn about liquid funds for NRIs.

Short-term Goals like Vacation, Down Payment (1-3 years): Ultra-short or short-duration debt funds. Short-term Mutual Funds, also known as low duration funds typically have a portfolio duration ranging from 6 months to 3 years. These funds invest in money market instruments and short-term bonds. Since they focus on shorter maturities, they minimise interest rate risk.

Medium-term Goals like Car, Home Renovation (3-5 years): Conservative hybrid or balanced advantage funds. The debt component provides stability while equity offers growth potential.

Long-term Goals like Retirement, Children's Education (7+ years): Equity funds, particularly flexi-cap or index funds. Time smooths out volatility and allows compounding to work.

Wealth Creation with No Specific Timeline (10+ years): Financial experts suggest that individuals should ideally invest for a period of 5 to 10 years, or even longer, to maximize the benefits of compounding and navigate market fluctuations effectively.

Explore options through our mutual funds tool and compare with NRI FD rates.

The Exit Load Factor

Exit loads are fees charged when you redeem before a specified period. They're designed to discourage short-term trading.

Typical exit load structures:

There is something called an exit load that will work against you when you trigger your MF exit early. 

An exit load is a levy on early exit of an investment in mutual funds and can either be 1 year or even 3 years. 

Normally, the exit load varies between 1% and 3% and can again alter the economics of your mutual fund investment.

For a ₹10 lakh investment with 1% exit load, early redemption costs you ₹10,000. That's on top of any short-term capital gains tax.

NRI-Specific Considerations: When Planning Return to India

If you're planning to return to India, your investment timeline needs additional planning.

RNOR Status Window

When you return to India, you may qualify for Returning and Not Ordinarily Resident (RNOR) status for up to 3 years. During this period, your foreign income isn't taxable in India.

Your mutual fund gains earned during RNOR period receive the same treatment as NRI taxation. Plan redemptions strategically around this window.

Learn about RNOR status benefits and tax status changes when returning.

Account Conversion Timeline

Your NRE account must be converted to a resident account within a reasonable time after returning. Similarly, investments linked to NRE accounts need restructuring.

Understand the full process in our NRE account conversion guide.

Currency Consideration

If you've invested in INR and the rupee depreciates during your holding period, your returns in USD/AED terms reduce. This is a silent erosion many NRIs don't account for.

For those concerned about currency risk, GIFT City mutual funds offer USD-denominated alternatives. Explore options through our GIFT City guide.

The 7-Year Rule: What Research Shows

Analysis of data suggests that 7 years is the magic number for long-term equity investing. While it's good to stay invested for the long term, it is essential to keep the following things in mind: Research is the key to identifying the best suitable fund matching the investor's financial goal.

Why 7 years specifically?

Historical analysis of Indian equity markets shows that 7-year rolling returns have rarely been negative. The market has experienced multiple complete cycles (bull run followed by correction followed by recovery) within this timeframe.

Additionally, 7 years gives fund managers enough time for their investment thesis to play out. A company identified as undervalued might take 3-4 years just to reach fair value, then another 2-3 years to generate above-average returns.

This doesn't mean you should blindly hold for 7 years without monitoring. Investing for the long term requires a strategy, discipline, and consistency. It requires continuous monitoring of the portfolio. And, most importantly, patience.

Track market movements with Gift Nifty and explore alternative options through GIFT City Alternative Investment Funds.

Reviewing Without Overreacting: The Annual Check-In

It's recommended to review your mutual fund returns at least once a year. This will help you understand whether your investment aligns with your financial goals. During periods of market volatility or significant economic changes, try to make reviews more frequent, say quarterly reviews.

What to check during annual review:

Performance vs Benchmark: Is your fund beating its benchmark index over 3 and 5 years? Minor underperformance (1-2%) is acceptable. Consistent major underperformance isn't.

Performance vs Peers: How does your fund rank within its category? Top quartile is ideal, but second quartile is acceptable. Consistent bottom quartile performance signals problems.

Expense Ratio Changes: Has the fund increased its expense ratio significantly? Higher costs directly reduce your returns.

Fund Manager Changes: Did the star fund manager leave? Monitor performance for 12-18 months post-change before deciding.

Portfolio Drift: Has the fund's investment style changed? A large-cap fund holding 40% mid-caps might not match your original allocation strategy.

Compare funds effectively using guidance from our article on how to choose mutual funds.

What Happens If You Need Money Before Your Target Period?

Life happens. Sometimes you need funds before your planned exit date.

Option 1: Partial Redemption

Redeem only what you need. Keep the rest invested. This minimizes the impact on your long-term wealth creation.

Option 2: Loan Against Mutual Funds

Many banks and NBFCs offer loans against mutual fund units. You get liquidity without breaking your investment. Interest rates range from 9-12%, which might be lower than the opportunity cost of exiting during a market low.

Option 3: Systematic Withdrawal Plan (SWP)

Instead of lump sum redemption, set up an SWP to withdraw fixed amounts monthly. This spreads your redemption across different NAV levels, similar to how SIP works for investing.

Learn about generating income from investments in our guide on mutual funds for regular income.

The Bottom Line: Match Holding Period to Fund Type and Goals

Knowing how long it takes to hold your mutual fund is one of the most important parts of investing. Equity funds usually need more time, while debt funds can be used for short-term goals. But whatever you choose, the holding period should match your goal.

The ideal holding periods: Equity funds need 5-7 years minimum, debt funds work for 1-3 year goals, and hybrid funds fit the 3-5 year range. ELSS has a mandatory 3-year lock-in but benefits from longer holding.

Tax efficiency improves with longer holding for equity funds (12.5% LTCG vs 20% STCG). Exit loads penalize early redemptions. Review annually, but act only when there's genuine underperformance over 3+ years.

For NRIs planning to return, factor in RNOR status and account conversion timelines. Currency risk remains a consideration for all NRI investments unless you choose USD-denominated options.

Thousands of NRIs discuss investment timing strategies in our WhatsApp community. Join them for peer insights and expert guidance on optimizing your holding periods.

Ready to plan your investment timeline? The Belong app helps you track your mutual fund portfolio, monitor performance, and make informed decisions about when to stay invested and when to exit.