Mutual funds are an investment vehicle that holds the potential to offer investors with capital appreciation over the long term. Equity mutual funds are those funds that predominantly invest in equity and equity related instruments. An equity mutual fund invests a minimum of 80 percent of its total assets in equity and equity related instruments. Equity funds are one of the most sought-after mutual funds. These are famous among Indian investors because of their high risk-reward ratio. What fund houses owning equity funds do is that they collect money from investors seeking capital appreciation through investments in equity mutual funds and invest this pool of funds across stocks and equity related instruments. In which stocks an equity fund will invest will totally depend on the nature of the scheme and its risk profile. For example, a multi cap fund will invest in stocks of companies with small, medium and large market capitalization. Whereas a blue-chip fund may only invest in stocks of companies with large market capitalization.
Equity related mutual fund schemes always carry a high-risk profile. Hence, investors are expected to consult their financial advisor before investing. If you are keen on investing in equity funds to meet your life’s financial needs, here’s why you should start investing at an early stage in your life:
Benefit from the power of compounding
In mutual funds, compounding refers to the interest earned on the interest earned from the initial investment amount. Whenever your equity fund makes profit, the capital appreciation by the scheme is invested back in the fund. The interest keeps getting added to your gains and in the long run, your small investment in the equity fund can multiply and turn into a commendable corpus. However, compounding generally works for investors with a long-term investment horizon.
Make the most out of your SIP
If you really want to witness your small equity fund investment to transform into a large corpus then you need to start a Systematic Investment Plan. Thanks to SIP, investors do not need to make large lump sum payments in mutual funds. They can choose an investment amount that they are comfortable with and invest this amount every month till their investment objective is achieved. If you are a KYC (Know Your Customer) compliant individual, you can invest in equity mutual funds from the comfort of your home or office using a laptop or even a smartphone with a decent internet connection.
You have more time in hand
The biggest for starting early investments in equity funds is that you have more time in hand to accumulate wealth. Historically, equity investments have shown their true potential when investors have remained patient and keep a long-term investment horizon. The earlier you start, the more money you will be able to save and over a course of 20 to 30 years, you may succeed in wealth creation.
Inculcate the discipline or regular investing
Taking the initiative of saving and investing at an early stage in your life may inculcate the discipline of regular investing. Most investors have tasted success in their investment journey solely because they never missed their monthly SIP investments in equity funds. If you are young, now is the time to start systematic and disciplinary investing. Of course, it is easy to get smitten away with the idea of spending first and saving later. But if you really want to make sure that you aren’t financially dependent on anyone in future, you may have to make some tiny sacrifices now.
Now that you know the perks of starting early investments in equity funds, when are you planning on investing? Before you take an investment, decision do bear in mind that equity funds do not guarantee returns and hence it is better to invest depending on your appetite for risk.
Hemant Kumar is a project manager at Tridindia with more than nine years of commendable experience in writing about LMS, translation, and IT. His unmatched talent and passion for digital marketing gave him the opportunity to work as a multi-tasking project manager at TridIndia’s sister company, Link Building Corp. Today, he contributes to the world by imparting knowledge on SEO, link building and internet marketing etc., that helps business owners grow their online business.