Investing in mutual funds can be a smart way to grow your wealth and fulfil long-term financial goals. There are different types of mutual funds, each helps to meet the particular needs and goals of investors. One such category is equity funds which majorly invest in stocks of companies that have strong growth potential. These funds are managed by professional fund managers who use their expertise to identify stocks of companies with a high probability of future growth.
Since equity funds invest in the stock market and the returns depend on the underlying securities’ performance, these funds carry a higher risk. But, when held for the long-term, the benefits of these funds extend beyond high returns, including the potential for tax savings, the opportunity to beat inflation, and the ability to pass on wealth to future generations. Let’s explore each benefit in detail.
- You can maximise the benefits of power of compounding
When you invest in an equity fund and leave it to grow, the returns you receive start generating returns of their own, which, in turn, generate more returns. This is known as the power of compounding which over the long term can lead to exponential growth in your investment.
But you can achieve this compounding effect only if you remain consistent with your investments over the long term. If you keep withdrawing your returns and profits, you will miss out on the benefits of compounding, and your returns can fall short of expectations.
- Helps mitigate risks
Markets are volatile, and prices fluctuate frequently. A short-term approach with equity investments can lead to losses as prices may not always reflect the true value of an underlying asset. But holding investments for the long term increases the chances of generating profit as, over time, a company’s fundamental aspects, such as earnings, dividends, and assets, are reflected in the stock price.
- Encourages disciplined investment
A long-term approach with equity mutual funds helps to encourage disciplined investment. Instead of trying to time the market or make quick trades based on short-term news, you can focus on building a balanced mutual fund portfolio and sticking with it over time.
One way to ensure disciplined investment is to start a systematic investment plan (SIP). By investing a fixed amount at regular intervals, you can avoid the pitfalls of emotional decisions that can have a negative impact on your portfolio. Over time, SIP also helps you take advantage of rupee cost averaging, which means you buy more units during bear markets and fewer during bull markets, thus lowering your average cost per unit and bringing more returns.
- Increases your chances of reaping long-term growth benefits
Perhaps, the most significant benefit of investing in equity funds with a long-term horizon is their potential for high growth and capital appreciation over time. By investing in stocks of companies that have strong fundamentals and a history of growth, you have the opportunity to share that growth over time. This can help you build wealth and achieve your goals as you focus on the big picture, making you less vulnerable to short term market fluctuations.
- Provides higher net returns
Short-term investing needs frequent buying and selling of stocks or mutual funds, which attracts transaction costs, taxes, and other charges. Long-term investing reduces such expenses, as there are fewer transactions. So, if higher net returns are what you are after, investing in equity funds with a long-term perspective might be just the strategy to help you succeed financially.
To wrap up
Rather than reacting to short-term market fluctuations, a consistent approach can allow your equity investments to grow over time, take advantage of compound interest and ride out market fluctuations better.
Also, consulting with a financial advisor can be helpful to decide which mutual funds to invest in and when. This can further help you create a long-term investment strategy while allowing you to take one step closer to the long-term financial stability and growth you desire.
