Be wealthy with equity mutual fund investment

If your investment is not able to beat inflation its worthless investment because, it is losing its real value with time. Most of the safe investment options offer you a return that is just good enough to beat inflation. There have been several instances in last 15 years when the return on fixed deposit, which is a safe fixed income investment option, was even less than the inflation rate. So such an investment at best helps you just to hold on to the value of your saving. It does not give you any extra return. So unless an investment generates a return much more than inflation it cannot be considered a good investment.

Will tell you how equity mutual fund helps you generate higher return and what should be your basic preparation when going for equity mutual fund investment.

Let us understand how inflation and return are linked

Let us consider a scenario in which you have Rs 1 lakh of saving at present and wish to invest it for next 15 years during which inflation remains at 7%. Now, Depending upon your investment option and annual return it generates your maturity amount will vary. If your safe investment generates an annual return of 6% return, your saving will lose its value over 15 years and will be worth only Rs 86,005. If you manage to generate a return equal to inflation that is 7% then your savings will just be able to maintain it value of Rs 1 lakh. At 8% return your savings will grow to Rs 1.16 lakh. At 9% it will grow to Rs 1.34 lakh. At 10% it will grow to Rs 1.56 lakh. At 12% you will have a corpus of Rs 2.07 lakh. Similarly at 15% your investment will grow to Rs 3.17 lakh. But the question now is how to generate a return which continuously beats inflation in the long run.

How equity beats inflation and gives superior return

The answer is that your money should work hard and generate higher return rather than just holding on its value against inflation. To do so you will need to look for equity investment which is known to generate higher return over a long period. We can verify this with Sensex which gives us indication of broader equity market return. For instance, for any investment period of 15 years from January 1980 till February 2004 your return on investment would have been more than 9% at 97% of the occasions. 

At around 94% occasions your return would have been more than 10%. 

At around 80% occasions your return would have been more than 12%. 

And at around 38% occasions your equity investment would have generated a return of more than 15%. So if you wish to generate wealth, equity is the best investment vehicle to do so.

Maturity amount on monthly investment at different return

When the time horizon for your equity investment is long the best way is to go for small but regular investment. If you go for a monthly investment of Rs 5,000 for a period of 15 years then at 8% annual return the maturity amount that you will get after 15 years will be Rs 16.88 lakh. If the rate goes up to 9% then the maturity amount rises to Rs 18.33 lakh. At 10% annual return you will get an amount of Rs 19.92 lakh. 

However if your return on investment is 12% you will get Rs 23.57 lakh. And in case the return is 15% then the maturity amount rises to Rs 30.46 lakh. Such high return is rarely possible through fixed deposits which are safe but give very low return. So, your best chance to generate high return is to invest in equities.

Invest in equity through MF

Though equities offer best return potential but also come with a corresponding risk. So unless you understand the risk, getting into equities blindly could be a risky proposition. First thing you should keep in mind is that equities investment needs high level of capital market knowledge, excellent skill to indentify right investment opportunities and superior expertise to manage investments. Having these skills is not everybody’s cup of tea. However, there are market experts who are skillful in managing investment and also offer their services to layman investors. This is done through an investment tool called Mutual Fund which offers such a mechanism in which experts manage investment for a large pool of small investors. They keep a track of market movement round the clock. Therefore it is best for a new investor to invest in equities through mutual funds. While fund managers work on your investment you can concentrate on increasing your income and savings. With time as your market awareness grows and you become confident about stocks you can start investing directly into equities.

Manage your exposure based on your risk appetite

Even when you invest in equities through MF it does not become completely risk free and will be subjected to market related volatilities. As one should not keep all eggs in one basket similarly even though equities have high return potential, you should not put all your savings completely in equities. You should assess your risk appetite and limit your equity exposure accordingly.

Your ability to take risk will depend upon many factors such as assets, liabilities, income, expenses, future goals, time left to achieve these goals, stability of future income, risk mitigation measures such as insurance and so on. However it will be difficult for you do the exercise of assessing exact risk appetite without a professional financial planner. But there is an alternative in terms of a simple way of doing it. You can follow a thumb rule of measuring your risk appetite. This is called rule of 100. 100 minus your age is your risk appetite. This gives you a broad indication of how much of your savings should go towards equity investment. So if your age is 30 years your risk appetite is 70% so you can investment upto 70% of your savings in equities for long term. Similarly if your age is 50 years you should not invest more than 50% in equities. If your age is 70 years you should not have more than 30% exposure in equities.

Regular Review is a must

Equity Mutual Fund investment is a field in which you cannot rest indefinitely after parking your money. Due to heightened competitions among the established companies and rush among startups jostling to break into the league of successful companies, the scenario may change very quickly. Though you get some sense of relief by investing in MF as you do not have to monitor your investment on day to day basis which otherwise is required in the case of direct stock trading, however you would at least need to review your investment into equity mutual funds on a quarterly basis, which is after interval of 3 months.