How Equity Mutual Funds help create wealth in the long term
How Equity Mutual Funds help create wealth in the long term
An insight for disciplined Equity fund investor who wants capital appreciation over a long term period.
Equity Mutual Funds over the years have gained immensely in their popularity and effective way for investors to participate in financial markets. They are a great alternative for a retail investor who wants to invest in stocks without having to worry about constantly monitoring the market. The money Is pooled with like-minded investors and managed by a fund manager. The fund manager is responsible for picking the stocks, tracking, making sector and asset allocation, buying and selling when required.
However, making money in equities isn’t easy, requires patience and discipline, as well as a sound understanding of the market. Even for investors who are using professional expertise. Patience and discipline do reflect your level of risk and will affect your potential return. It is important to understand your risk appetite before delving into investments.
Why do you need a plan?
Without a plan for medium to long-term investing, you might struggle to make decisions that accurately reflect your investing goals.
Equity mutual funds offer a plethora of schemes to choose from for both retail and institutional investors to participate and benefit from the uptrends in capital markets. Investors need to evaluate and consider the various factors before making any investment decision.
As an investor looking to achieve greater returns over the medium-long term period, it’s a great idea to adopt a goal-based investment strategy. This type of strategy identifies a goal and quantifies that goal by inflating it to get a realistic target. This inevitably helps you to put together an investment plan to achieve your goal. This process is useful for investors who want to prevent making rash investment decisions by providing a clear process of identifying goals. It is key for a discipline investor to consider investment objectives for the foreseeable future and invest in line with your risk appetite and current financial position.
One of the key objectives of a mutual fund scheme is to diversify risk. An investor can invest in mutual funds to invest in a well-diversified portfolio and let the fund manager assess the levels of risk in order to achieve the scheme’s objectives. Therefore, while evaluating and comparing the performance of the schemes, the returns should be measured taking into account the risks involved in achieving the returns.
Comparative Analysis of Risk, Return and Diversification of Mutual Fund
With the introduction of innovative mutual products, there is now a lot to offer to both retail and institutional investors. The industry caters to all types of investors depending on their investment objectives and risk appetite. Risk measure mostly deals with the character of a funds return and the manner in these returns have been achieved.
Below is a brief graphical analysis of how diversified equity mutual funds have performed vis a vis Nifty 50 over a 10-year time period
The idea is to focus on real rate of returns (Nominal rate of return – inflation). Majority of the financial instruments such as Bank FDs, NSCs and PPF provide minimal or Nil real rate of returns over long term. This erosion of purchasing power has a negative impact on savings while the purpose of investments is the opposite. With equity and debt mutual funds, an investor has a greater chance of earning above inflation long term returns. However, these investments should be done keeping the risk appetite and time horizon in mind.
