09 May 2019 | 4 min min read
Mutual fund refers to an investment programme where a pool of money is collected from many investors and then this money is invested in stocks, debt funds and bonds. Individuals can invest their money in mutual funds either in a lump-sum manner or through the SIP (Systematic Investment Plan) mode.
In other words, mutual funds invest the investor’s money in the stock market. However, as an investor, you might have found that the stock market is very difficult to understand and it’s not easy to comprehend as to why markets are so volatile.
You might have a lot of questions like, 'Is it a good time to invest now?' or 'Will markets achieve high tomorrow?' But what we don't understand is we can't predict what the market is going to hold for us in the future. As an investor, it is important not to dwell on such questions, but rather remain invested in a long term scheme.
When you are planning on investing for your future, there are a lot of publically traded companies and investments in the market to choose from that allow investors to vest their wealth in the mutual funds.
Even though there's no specific handbook or guidebook which explains the policies and procedures that the investors are supposed to follow, there's but one golden rule which an investor needs to make allowances for - Invest for Long Term.
Why go for a long term mutual fund investment? Is there any benefit of staying invested for a long term?
And the most predictable and important question all of us want an answer for:
'Will I become rich by investing in long term mutual fund schemes?'
The market acts differently for short-term and long-term investments. Even a good mutual fund goes through some ups and downs with the fluctuation in the market and can swing in either direction based on lots of factors. However, an investor can benefit from the absolute stability that a long-term investment offers and not worry about the volatility of the market. That is why a long-term investment is ideal for an investor who is looking to harvest returns for 10 or more years into the future.
Here are some of the benefits that justify why long-term mutual fund investments are ideal for people who wish to grow their capital in the long run:
If the period of investment in mutual funds is more than 1 year then the capital gain from the funds is relieved from any tax liabilities. You can get tax benefits on long-time investments including investments in mutual funds. The Government of India has also provided a tax exemption on equity mutual funds under Section 80C of Income Tax Act 1961. As per this programme, an investor can enjoy tax-deduction of upto Rs. 1.5 lakhs from their taxable income to reduce their financial obligation.
Also read: How Mutual Funds are better tax saving instruments than others
One of the main advantages of a mutual fund is its rupee cost averaging approach wherein investors invest a fixed amount of money at fixed time intervals.
You can invest an amount as low as Rs. 500 a month and can increase this limit as per your capacity. This amount is regularly invested in the market to buy stocks which is useful in the long term wealth accumulation.
While making any investment decision, your age and financial obligations are considered to be the most important factors. Investing in mutual funds at an early age and for long run allows you to exact the reward of compounding.
In compounding, interests accumulated from the investments that are not spent are added to the principal over the period of time, which in turn earns interest.
For example, if you make an investment of Rs. 20,000 at the rate of 10%, then you will get a capital gain of Rs. 22,000 at the end of 1 year.
If you reinvest this interest of Rs. 2,000 for the same return rate with the original principal amount, then on the end of the second year you will get a financial gain of Rs. 24,200. On other hand not reinvesting might have resulted in the capital gain of Rs. 24,000. This difference may seem inconsistent for a short-term period, but for a long-term investment of 10 years or more this capital gain can accelerate your original income into greater returns.
Simply put, the more time you give your investments, the more you will be able to enhance the financial potential of your original income.
For more information about the amazing power of compounding interest to generate great corpus visit How to get rich with the power of compounding interest?
Mutual fund investment diversification is one of the greatest advantages to investors investing in mutual funds. Because of the diversification, an investor can obtain instant access to the maximum number of stocks of different caps and bonds at a low minimum investment.
Thus, by going with just 2 to 3 mutual funds, an investor can achieve diversification to add to their portfolio.
Uday Kotak, Executive Chairman and MD of Kotak Mahindra Bank, shared his view on the current market saying, 'If you ask me overtime, I am a believer in the Indian financial saving story getting stronger, a lot more savers are moving money away from gold and real estate into banks, mutual funds, insurance and equities'. Thus, concluding that the financial sector of India has a fairly good long-term future.
So, as long as you can afford, stay invested for an extended period of time - especially in the mutual funds and equities. However, before you start investing, whether in a short-term or long-term planning, you should have a clear goal in mind.
Don't know where to start?
Afinoz, an online financial marketplace offering investment products will provide you with the real-time SIP investment advice and services. It will also help you as a mutual fund advisor to get you the best performing Mutual Fund - SIPs according to your risk appetite. You can contact us for any investment advice at 0120-411-0376 or mail us at firstname.lastname@example.org.