If you are planning to start investing a portion of your monthly savings, congratulations you are finally excelling at financial planning. The first step of financial planning is money management and if you have learned to save and are now starting to invest, you are not far away from your life’s financial goals. Once you know what you want to achieve with your money, investment planning becomes a lot easier.
If you have a moderately high-risk appetite and are keen on seeking capital appreciation through investments in market-linked schemes, you can consider investing in mutual funds. Mutual funds have become popular in India these days. Ever since its introduction to Indian investors back in 1960, mutual funds have been evolved and regularized over the years by SEBI so that more people can make the most out of this investment vehicle. Mutual funds offer active risk management, are handled by a team of experienced fund managers, offer the diversification, and are a better option as compared to direct stock investment.
What fund houses do is they collect money from investors sharing a common investment objective and invest this pool of funds across the Indian and foreign economies. The money is invested across various money market instruments like equity, debt, government bonds, corporate securities, treasury bills, certificate of deposits, company fixed deposits, etc. Which asset class and how much portion a mutual fund will allocate might totally depend on the nature of the scheme and the risk profile that it carries. Mutual fund investors will be allocated mutual fund units in quantum with the investment amount and depending on the fund’s existing net asset value (NAV).
SEBI has further categorized mutual funds based on their certain unique attributes like fund size, asset allocation, risk profile, investment strategy, etc. The motive behind this subcategorization is for investors to be able to make an informed investment decision. Of the several mutual fund categories available, equity mutual funds have always been a favorite among seasoned as well as new-age investors.
What are equity funds? Can they help achieve long-term goals?
Equity mutual funds are those funds that predominantly invest in equity and equity-related instruments. An equity mutual fund may allocate anywhere from 65 percent to 80 percent of its total assets to stocks of companies. A blue-chip fund invests in stocks of companies with large market capitalization whereas a multi-cap fund invests in stocks of companies with small, medium, and large market capitalization. There are several other equity funds whose portfolio depends on the investment objective of the scheme.
The reason most investors consider investing in equity funds for the long run is that historically, equity mutual funds have given far better results for those investors who remained invested for a tenure of ten years or more. That’s because equity funds are volatile in nature. Their performance can get affected by daily market movements. Hence, they are a risky investment for the short term. But over the long term, the market has always excelled. There is very little or nil chance of an investor incurring losses in equity funds if he or she remains invested over the long term. In fact, if you remain invested for the long run with equity investments, your small investment amount can turn into a large commendable corpus, thanks to the power of compounding. This is why most investors consider investing in equity mutual funds for wealth creation or of meeting long-term financial goals like retirement planning or building a corpus for their daughter’s destination wedding or for sending their children abroad for foreign education.
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Now although equity mutual funds can help investors achieve long-term financial goals, they do not guarantee any returns. Hence investors are expected to determine their risk appetite and only invest if they have a long-term investment horizon to remain invested in equity mutual funds.