Mutual fund schemes have emerged as a simple and effective financial tool for creating wealth over the long term. Among the different kinds of MF schemes, such as equity funds, debt funds or a mix of them, the equity mutual funds are suited for long term goals. As the name suggests, the equity funds invest in equity assets i.e. in the stocks listed on the stock exchanges. The returns generated in equity funds are not fixed nor guaranteed and instead are market-linked. This means, the investment in equity funds is prone to fluctuations and the NAV of these funds can move up and down over time.
The good part is that history has shown that the equites tend to drift upwards over the long term. To an investor, it can, therefore, be construed as an financial instrument that has the potential to generate inflation-beating return over a long term and not necessarily in the short-to-medium term. So, if your goals are long term in nature, at least 7 to 10 years away, your systematic savings in MFs may help you build a decent corpus.
But, what if you still do not want to invest in equity funds and instead look for other investment options? Yes, there could be certain instances when equity funds may not suit your needs. Here are a few of those circumstances but if you don’t fall into any of those, then staying away from equity funds may not be the right approach with your finances.
When you want a fixed return: Most retirees look for a fixed return on their corpus as they need a regular income to sustain their retirement expenses. For them, preserving capital is important more than creation of wealth and hence they opt for fixed-income investments. Fixed income investments have low returns and are mostly subject to taxation. The post inflation real returns are low in them and do not suit wealth creation. However, they still need to take some exposure in equity oriented funds including hybrid funds so as to beat inflation during their retirement years.
If you are not looking for a fixed return and want to create a corpus for long term goals, you need to make use of the power of compounding by following the SIP mode of investing in equity mutual funds.
If inflation is not a concern for you: Inflation eats into the purchasing power of rupee. Over time, there is a considerable impact on the worth of the rupee as against its value today. Illustratively, if your monthly household expense is Rs 65000 today, assuming annual inflation is 5 per cent, you will need Rs 1.35 lakh after 15 years to sustain the same standard of living.
In order to beat inflation, you may have to invest a higher amount even at a lower rate of interest. Else, you will have to use the potential of equities to generate a high inflation adjusted return over the long term, even with lesser savings.
You do not like volatility in returns: It is true that the equity asset class is much more volatile than other assets such as real estate, gold or debt. However, over the longer time horizon, the volatility works in favour of investors. The potential for a high inflation-adjusted return is more in equities and hence the need to take exposure in equites is required.
To begin with one may start investing in index mutual funds and large-cap funds and later on add mid-cap funds to the portfolio. Being a volatile asset, there will be dips, corrections during the course of investing. As an investor, you need to make use of such opportunities and keep adding more funds during such periods. Managing risk to reap rewards in the long term should be your approach to build wealth over the long term.
You do not want to follow an asset allocation plan: Many investors keep hopping between one asset class to another in order to make returns. They invest in gold when the gold prices are moving up and then invest all in real estate when property prices are on the up. Timing the market and putting all the savings into any one asset class is not the right approach. Proper diversification across assets and even within assets is a better way to manage savings.
Equity mutual funds are suitable for long term wealth creation. And not just equity funds, there are gold funds, debt funds and even real estate funds to help you build an investment portfolio for all your short-medium to long term goals. If you haven’t started investing in equity mutual funds and still looking for other investment options, maybe it’s time to think again!