Long-term investment planning requires a lot of research and clarity of investment objectives. Investors must select the right tools for investment planning and a disciplined approach to create wealth. Equity mutual funds offer a potential for competitive returns as compared to other traditional investment vehicles.
Equity funds primarily invest in company stocks. Investors can then benefit from the growth of a company and its performance. Read on to learn more about creating long-term wealth with equity mutual funds and more.
What Are Equity Mutual Funds?
Equity Mutual Funds invest in shares of multiple companies spread across various sectors. This allows diversification across sectors and market capitalization to maximize returns. These funds are managed by professionals known as fund managers and often deliver better returns than term deposits and debt funds.
For instance, a defence fund invests in companies operating in the defense industry. The investment is spread across companies manufacturing these equipment or offering services in this sector, which reduces the risk of investing in a single defense company.
Equity funds generate returns through two main processes:
- Capital Gains arise when fund managers sell stocks at higher prices and reinvest gains for compounding growth.
- Dividends are earned as a share of profits from companies. These dividends are then re-invested by the fund manager to create long-term wealth.
Equity mutual funds are suitable for investors who have an appetite for high risks and want long-term returns.
Equity Mutual Funds and Long-Term Wealth Creation
Here is how equity funds help with long term wealth creation.
1. Sustainable Returns
Equity Mutual Funds are known for their ability to deliver sustainable returns. As opposed to returns received from fixed deposits or savings accounts, mutual funds give higher returns. By investing in growing companies, these funds allow an investor to benefit from profits earned by the corporate sector.
2. Expert Fund Management
They are managed by fund managers. These stock market experts analyze the market and predict upcoming market trends. They also analyze individual stocks to create a diversified portfolio. The aim is to help investors minimize their risks and ensure that investors stay on track.
3. Possibility of Dividend Income
Certain mutual funds provide investors with additional income called Dividends. These dividends are distributed by companies in the fund’s portfolio and can be reinvested into the fund. However, investors can also receive this income directly. Investors who are looking for some form of passive income can consider this investment option.
4. Ideal for a Wide Range of Investors
Equity mutual funds can benefit aggressive investors as well as conservative investors. For instance, conservative investors have a low appetite for risk and prefer investing in blue-chip funds. However, aggressive investors who have a higher risk appetite may prefer investing in sectoral funds. This versatility makes equity mutual funds an attractive option for a wide range of investors including amateur investors and seasoned ones.
5. Lower Taxation
Lower long-term capital gains tax makes it a better investment option for investors. In case investors want to hold on to their investment for more than a year, it is classified as long-term capital gains, which is 12.50%. Another tax-efficient investment scheme under Equity Mutual Funds is the Equity Linked Savings Scheme (ELSS). Investments up to Rs 1.5 lakhs are eligible for tax deductions.
Conclusion
Investors must stay patient and stay invested through various ups and downs in the market. Sustainable returns and payment of consistent dividends make equity mutual funds an attractive investment option. However, it is important to understand individual goals and risk tolerance levels to make an informed decision.
