As an experienced investor, you may be aware of what is a mutual fund and the various types of mutual funds that serve as excellent investment tools. But for a novice investor, it could need some convincing to get started on a mutual fund investment journey.
Beginners new to the world of investment typically tend to consider mutual funds as risky and overlook its potential. However, historically, mutual funds have earned investors higher yields than deposits; hence,equity funds can be suitable for every kind of investor seekinglong-term capital growth. But it would be good to know that the returns and risks could vary from one — as they are managed by fund managers.
This article lists reasons why investing in equity funds at an early stage can grow your wealth effectively.
- Start early to reap more significantreturns
Many investors hope to receive large profits with a substantial amountfor a short period. While this may sound optimistic, the strategy may not always work. It is an excellent idea to begin investing at an early stage, even if it means a small investment amount each month in equity funds. This way, you could reap significant returns over the years.
Let us understand this with an example:
Mr. A invests in equity mutual funds at the age of 22 with Rs. 500 per month; assuming the rate of return is 8%. At the age of 60, he will gain Rs. 14,77,155.
But, if Mr. A starts investing at the age of 32, with the same plan and rate of return, he could earn Rs. 6,24,282 when he turns 60.
The difference in yields, when investing at different ages is due to the power of compounding.
Hence, it pays to start investing as early as you can and for more extended periods.
- Manage finances based on your needs
When you invest in equity funds at an early age, you get adequate time to plan for your future. You can chalk out your short-term, intermediate and long-term financial needs and invest in mutual funds accordingly. Each scheme is different and comes with varied risk and investment horizons. You can balance the funds in your portfolio to cater to different financial goals. For example, one medium-term target would be to invest for 5 to 10 years towards a house or car purchase, or a long-term goal for 20 years towards building a retirement corpus.
- Tax planning option
Mutual funds also offer excellent tax benefits under Section 80C. For example, Equity-linked Savings Scheme (ELSS) have a lock-in period of 3 years with a tax benefit of Rs. 1,50,000under Section 80C of the Income Tax Act. You can either invest through lump-sums or activate Systematic Investment Plans (SIPs) to make small and steady investments every month.
Before you decide to invest in mutual funds, you may want to compare equity funds v/s debt funds and analyse how much from your portfolio can be allocated to equity mutual funds.Look at selecting mutual fund investment plans that match your investment philosophy and achieve your financial goals.