Traditionally, investors associate dread with equity investments marking it to be unsafe and volatile and avoid making such investments. The mindsets of investors often prick them to remain invested in debts, fixed deposits or traditional investment options. The investor is losing out the most because the investment is not getting optimal returns. On the other hand, the equity oriented mutual fund schemes have been performing well and generating returns if invested for a long term. Advisors and experts are often of the opinion that if an investment is being made for the long term with higher education or retirement as the goal then the investor should ideally invest in equity oriented funds as they have provided returns than any other asset class historically. Let us have a look why as an investor you should make equity investments a priority.
The Power of Compounding
Compounding has often been called the eighth wonder of the world. It is a means of generating wealth from investments by remaining invested for a longer period of time. The longer you stay invested, the more is the compounded return. The market oriented returns from equities as an asset class makes the rate of compounded returns more attractive than any other asset class. The prime reason why investors need compounding effect for their investments is because of rising future costs due to inflation. Simply speaking, due to inflation the amount with which you can sustain now will be much higher in future due to the demon called inflation.
If a lumpsum investment of Rs 1 lakh is compounded over a period of 20 years at 15% p.a. the total value of the corpus would be Rs 16.36 lakhs. Therefore, because of this compounding effect on your investments, you may be able to deal with a future goal. Similarly, if Rs 75,ooo monthly is enough to run your household today, then 20 years down the line, assuming inflation is at 7.5%, your monthly household expense would stand at Rs 3.19 lakhs. Hence, power of compounding is the only tool you have, to battle the inflation and stay ahead of rising costs.
Ease of Investment
To invest in equities one does not need a lump sum at their disposal. A minimum of Rs 500 is required to start investments (in case of ELSS equity schemes). Through Systematic Investment Planning (SIP) investors can start investing with as small a amount as Rs.500. Hence, investors can choose either to invest minimum Rs 500 per month or Rs 6,000 is a year, whichever is convenient to them. Investors can add lump sum to an ongoing SIP investment as well. In a fund house if a scheme is performing better than the invested scheme then investors can easily transfer from one scheme to another. The investors need to have one Mutual Fund ‘Know Your Customer (KYC)’ document to be able to invest across all leading fund houses. These days, investments can also be done online and mutual fund investments provide the ease of auto debit as well as direct credit in case of redemptions and dividend payments, etc. Hence, these features make it rather easy for investors to invest.
Investment in equities is perhaps the only avenue of investment where investors can build wealth saving taxes. Equity Linked Savings Scheme (ELSS) is an equity oriented mutual fund where investments up to Rs 1.5 lakhs is eligible for tax rebate as per the Income Tax Act 1961 under section 80 C. The dividend and the long term capital gains are tax free as well as per current regulations. The ELSS funds invest generally minimum upto 80% in equities and the remainder in debt etc. The lock in period in these schemes is three years which allows the fund manager to pick stocks which can generate returns. ELSS has the shortest lock in period among all the tax savings options making it a lucrative option for savings taxes and fulfilling future goals as well.
Diversification is that aspect of the fund that is stressed upon by the advisors based on the idea that all asset do not perform well at the same time. Equity Mutual Fund schemes are diversified in nature and they invest in equities of various sectors and companies through the corpus of the fund collected. Hence, in a single fund investments maybe made to the pharmaceutical sector, the mining and metal industry, or technology companies or and heavy metals, automobiles etc and thus making it a diversified investment.
The Liquid nature of the Funds
Open ended funds provide the option to investors to redeem their investments at any point of time. This provides investors with assurance that their money has not been locked it. The money can also be redeemed or transferred to other schemes in the same AMC depending upon the investors’ choice. The high liquidity also allows investors a space to experiment with equities and gauge the progress redeeming when they deem fit. Investors can either opt for the dividend pay-out option or growth option to multiply their investments. The other option is dividend reinvestment, where the dividends are reinvested and additional units are allotted allowing the investments to grow.
It is rather difficult to believe when the advantages of equities are preached. However, numbers do not lie. The table below projects the cumulative returns on equities over a period of ten years. The returns generated by equities probably surpass your expectations. The cumulative returns have been as high as 270% making it a very lucrative and beneficial option of investment for the long term.
Equity investments are perhaps the only means through which you can generate wealth by ensuring the investment receive optimum utilization. These investments aid your financial goals and the more you invest in equities the sooner you can achieve your goals. If you are a young investor about to make your first investment then equities are the route to take. It is time we did away with the existing myths and the cloak of dread that has been shrouded against these investments. So it is time you started investing while walking down the path of equities.
Any information contained in this article is only for informational purpose and does not constitute advice or offer to sell/purchase units of the schemes of SBI Mutual Fund. Information and content developed in this article has been provided by Advisorkhoj.com and is to be read from an investment awareness and education perspective only. SBI Mutual Fund’s participation in this article is as an advertiser only and the views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader