Why is Equity Fund Good for Long Term Investment?

If you have some goals to achieve in life that may require you to attain financial stability, then you may have to get a hold of financial planning. Financial planning is something that every individual should consider. The investment market is flooded with a plethora of investment products. Those who are new to investing may find it difficult to navigate through numerous investment schemes and narrow down to one. But if you have a defined set of short term and long term goals then making an informed investment decision might be possible.

If you know your financial goals, you may get a clear idea about how much money you might need to invest at regular intervals in order to get closer to your goals. But knowing your financial goals may not be sufficient, investors may have to understand their risk appetite before making the actual investment. A risk appetite is an investor’s ability to risk their finances with a particular investment scheme in order to fetch some capital appreciation. An individual’s risk appetite may vary on certain things like their age, income, existing liabilities, etc. Those with zero risk appetite generally settle with low fixed interest offering investment schemes. However, if you are someone who is alright with taking some risks with the hope of earning market linked returns in the long run, you may consider investing in mutual funds.

What are mutual funds?

In the recent past, mutual funds have gained popularity among Indian investors. A lot of individuals are considering investing in mutual funds because of the kind of capital appreciation they are offered in the past. What fund houses do is that they collect money from investors sharing a common investment objective and invest this pool of funds in various money market instruments including stocks, debt, corporate bonds, treasury bills, government securities, etc.

Mutual fund investors receive shares in the form of units. Investors are allotted units in quantum with the investment amount and depending on the fund’s existing NAV. A mutual fund’s performance may depend on the performance of its underlying assets.

What are equity mutual funds?

Mutual funds are further categorized to certain unique attributes like fund size, asset allocation, investment strategy/objective, risk profile etc. Equity mutual funds are those funds that predominantly invest in equity and equity related instruments. An equity fund generally invests anywhere between 65 to 80 percent of its total assets in equity and equity related instruments.

Why are equity funds good for long term investment?

Equity funds as the name suggests, invest a major portion of their assets in stocks and other equity related instruments. Ideally, equity oriented schemes tend to give the desired results only when one remains invested in them for the long run. So anyone with a long term investment horizon may consider investing in equity funds. If you have long term goals like retirement planning or securing your child’s future you may consider investing in equity funds. If you want to see your investments grow, you may have to give it some time. Especially when you are investing in equity funds, these funds need some time to evolve. Also if you remain invested for the long run, you may be able to beat inflation. Remaining invested for the long run has its own advantages. If you start a SIP in equity funds and keep a long term investment horizon, you may benefit from the power of compounding. Compounding has the power of turning small investment amounts into large corpuses. Hence, if you really want to watch your investments grow, you may have to continue investing systematically for the long run. If you redeem your capital gains from equity funds after 12 months, tax on gains upto Rs. 1 lakh is nil. This might be another reason why one should consider investing in equity funds for the long run. Investing in equity funds via SIP for the long term also helps investors benefit from rupee cost averaging. When the NAV of the fund goes down, investors are allotted more units. On the other hand, if the NAV of the equity fund goes up, investors are allotted lesser units.

Equity funds like Axis Bluechip Fund or Axis Focused Fund might help an investor build a decent corpus in the long run, but investors should first understand them before considering investing in them. That’s because investments made in equity funds are exposed to market volatility and there is a chance of your portfolio incurring losses. Also, returns from equity fund investments are never guaranteed. So if you have the appetite for investing in equity funds but don't know which one to invest in, you can do some research about them and consider investing in an equity fund that has been a consistent performer. If you feel that you need further assistance, then it is better to seek the help of a financial advisor.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.