How to create wealth by investing in equity mutual Funds

Equity mutual funds invest in shares of listed companies of various sectors and across market capitalization. Equity funds are one of the best investment options for long term wealth creation. In this article we will discuss some of the key advantages of investing in equity mutual funds and how you can create wealth by investing in them.

• Best asset class in the long term: Historical data shows that, equities areone of the top performing asset classesin the long run. In the last 20 years, while the BSE Sensex has given 11.72% annualized returns, other investment classes such as gold and fixed deposits have given 10.66% and 7.22% annualized returns respectively. Had you invested Rs 1 lakh invested in the Sensex (BSE Sensex comprises of top 30 stocks) 20 years back, it would have grown to Rs 9.55 lakhs, while in gold and fixed deposit it would have grown to only Rs 10.66 lakhs and Rs 7.22 lakhs respectively (Period taken from 01-01-1998 till 14-05-2018).

By investing through different category of equity mutual funds, you can earn higher return on your investmentover traditional investment options like fixed deposits and gold etc.

For example – In the last 10 years, large cap, multi-cap and mid & small cap category of equity mutual funds have given annualized returns of 10.60%, 11.25% and 14.78% respectively (source: CRISIL AMFI MF performance indices as on 31st March 2018)

• Diversification of risk: When we invest directly in stocks, we are exposed to company risk, sector risk and the market risk. By going through mutual fund investment we can invest in a diversified portfolio of stocks across different sectors as equity funds are able to diversify company specific risks and sector risks to a large extent. Significant investment outlayis required to build a diversified portfolio of stocks but as mutual funds work on the concept of pooling of money, mutual fund investors can achieve risk diversification even by investing a small amount.

• Professional and expertmanagement: Stock selection is a complex task which requires careful analysis of various sectors, companies and the economy. Asset Management Companies (AMCs) have teams of research analysts and fund managers who have the necessary educational qualification, expertise, experience and professionalism to analyze these complex factors. Each scheme is helmed by a fund manager(s) supported by the team of analysts. The track record of these fund managers is available in the respective AMC websites and mutual fund research portals. Mutual fund investors can leverage the experienceand expertise of the fund management team for their mutual fund investment and get better returns on their investments.

• Small investment amount:For creating wealth through equity mutual fund investmentsyou do not need a bulk amount to invest. You caninvest in equity mutual funds by way of lump sum investment of Rs 5,000 only. In case of ELSS schemes, the lump sum amount is as low as Rs 5000. For SIPs you can start with as low as Rs 500.
• Regular savings for creating long term wealth – You can invest in mutual fundsin a staggered manner through SIPs.SIPs offer a simple mechanism of investing small amounts at a regular frequency; say monthly/ weekly/ dailyin the scheme/s chosen by you,which can later be used for meeting your various financial goals. The SIP amount is automatically debited from your bankaccount on the specified day every month chosen by you and invested in the scheme of your choice.

By investing through SIPs, you can accumulate a fairly large corpus in the long term – For example – If you invest Rs 2,000 every month through SIPs in anequity mutual fund scheme, over a 20 year period, you can accumulate a corpus of around Rs 30.32 lakhs against your investment of only Rs 4.80 Lakhs (15% annualized returns assumption).As you can see, SIPs in equity mutual funds are an amazing way of creating long term wealth.

• Tax Benefits: Equitymutual funds as an asset class, enjoys significant tax advantages compared to other asset classes. Long term capital gains (investments tenure of more than 12 months) from equity mutual funds are only 10% if the capital gain amount is above Rs 1 Lakh in a financial year. Short term (investments held for less than/ upto 1 year) capital gains are taxed at 15%.