Equity based Mutual Funds offer excellent scope for wealth creation in the long term. By long term I mean over a period of ten years or more. It is an established fact based on empirical evidence that Indian stock market indices have always given positive returns over a period of ten years and more. There has not been a single instance wherein the Sensex or Nifty or any other Stock Market index in India has given negative returns over a ten year period. Thus investments in stock market indices like BSE Sensex and Nifty along with actively managed mutual funds in the mid cap and small cap categories can used to save money for retirement, children’s higher education, children’s wedding and similar long term goals. Today we will discuss how to use Mutual Funds to achieve different long term goals?
To save for the long term, resources should be allocated to Large Cap based stock market indices like BSE Sensex and NSE Nifty and Nifty Next Fifty along with some allocation to some good mid cap and small cap funds for additional alpha. It is safe to expect a return of 12% per annum or more (Compounded Annual Growth Rate) with equity based Mutual Funds in the long term (based on past performance). Thus if you invest ₹ 10000/- per month for ten years you should be able to generate a corpus of ₹ 23,23,391/- over ten years @ 12% per annum. Over a period of twenty and thirty years ( at ₹ 10000/- per month) you should be able to save ₹ 99,91,471/- and ₹ 3,52,99,138/- respectively. Although past performance is not a guarantee of future returns, the Sensex has given a return of over 14% per annum Compounded Annual Growth Rate in the past thirty five years
As you can see from the above examples, equity based mutual funds can be used very effectively to save money for long term goals like retirement, children’s higher education and children’s wedding. Infact even after you achieve your goals you must allocate a certain percentage of your investments to equity based mutual funds to beat inflation over the long term.
From the above examples you can see that there is a huge difference between the returns generated over thirty years, twenty years and ten years. Therefore it is important to start early. The reason behind the vast difference in returns over different periods is the power of compounding. Power of Compounding is often referred to as the eight wonder of the world.
Let me add a word of caution. Over a period of five years or less investments in Equity based Mutual Funds can be very volatile and their is a probability of loss of principal if you withdraw your funds prematurely.
Unlike Insurance products you can stop your SIPs at anytime without the threat of loss of principal and allow your existing investments to grow.
If you need more insights about how you can garner the potential of Equity Mutual Funds, Systematic Investment Plans and the Power of Compounding, please do call us to understand more.
Mungekar Wealth 