How to create wealth by investing in equity mutual Funds

How to create wealth by investing in equity mutual Funds

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

· Best performing asset class in the long term : Historical data shows that, equity is the best performing asset class over a long investment period. In the last 20 years, the BSE Sensex has given 11.72{07e6f45e06b6212b7758d6987e781210b71bc7c7e73296f3ecfd05a590ad5307} annualized returns, while gold has given 10.66{07e6f45e06b6212b7758d6987e781210b71bc7c7e73296f3ecfd05a590ad5307} and fixed deposits have given 7.22{07e6f45e06b6212b7758d6987e781210b71bc7c7e73296f3ecfd05a590ad5307} annualized returns respectively. Rs 1 lakh invested in the Sensex 20 years back would have grown to Rs 9.55 lakhs, while the same amount invested in gold and fixed deposit would have grown to 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 funds, you can earn much high return on investment than the traditional investment option like fixed deposits and gold etc. For example – In the last 10 years, large cap, multi-cap and mid cap category of equity funds have given annualized returns of 10.6{07e6f45e06b6212b7758d6987e781210b71bc7c7e73296f3ecfd05a590ad5307}, 11.35{07e6f45e06b6212b7758d6987e781210b71bc7c7e73296f3ecfd05a590ad5307} and 14.90{07e6f45e06b6212b7758d6987e781210b71bc7c7e73296f3ecfd05a590ad5307} respectively (source: Valueresearchonline data as on 14-05-2018).

· Diversification of risk: You can create wealth by investing in equity mutual funds as you can diversify your 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 outlay is 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 with a much smaller investment.

· Professional Management: Stock selection is a complex task which requires careful analysis of different factors like capital structure, financial performance, financial risks, competition, industry growth factors etc. Asset Management Companies (AMCs) have teams of research analysts who have the necessary experience and expertise to analyze these complex factors. Each mutual fund scheme is helmed by a fund manager(s) supported by the team of analysts. The track record of the fund manager is available in the public domain. Mutual fund investors can leverage the experienceand expertise of the fund management team for their mutual fund investmentand get better returns on their investments.

· Systematic and lump sum investingoptions: For creating wealth through mutual fund investments you do not need a bulk amount to invest. You caninvest in equity mutual funds by way of lump sum as well as systematic investment plans (SIP). Mutual Fund systematic investment plans (SIP) offers a convenient mechanism of investing small amounts of money every month in equity mutual funds to be used for meeting your long term financial goals. The SIP money is automatically debited from your bank account on a specified day every month and invested in equity mutual fund scheme/s of your choice. Over a period of time one can accumulate a fairly large corpus – For example – If you invest Rs 2,000 every month through SIPs in anequity mutual fund scheme, over a 20 year period, assuming you get a 15{07e6f45e06b6212b7758d6987e781210b71bc7c7e73296f3ecfd05a590ad5307} return on investment, you will be able to accumulate a corpus of around Rs 30.32 lakhs against your investment of Rs 4.80 Lakhs only. This is an amazing way of long term wealth creationpotential of mutual funds.

· Tax Advantage: Equity funds as an asset class, enjoys significant tax advantages compared to other asset classes. Long term (investments held for more than 12 months) capital gains from equity mutual funds are only 10{07e6f45e06b6212b7758d6987e781210b71bc7c7e73296f3ecfd05a590ad5307} if the capital gain amount is above Rs 1 Lakh in a financial year. Short term (investments held for less than 12 months) capital gains are taxed at 15{07e6f45e06b6212b7758d6987e781210b71bc7c7e73296f3ecfd05a590ad5307}. Dividends paid by equity mutual funds are also tax free in the hands of the investors but a dividend distribution tax (DDT) is paid at the rate of 10{07e6f45e06b6212b7758d6987e781210b71bc7c7e73296f3ecfd05a590ad5307} by the AMC.

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