Investing in mutual funds is now becoming a popular trend especially among young investors. People have realized that investing in conventional investment avenues might not be of any use as the interest rates not just in India but all over the world have drastically fallen. Mutual funds on the other hand might not guarantee returns but they have the potential to outperform any other type of traditional instruments and deliver decent returns over the long term.
Investors can diversify their investment portfolio with various types of mutual fund schemes to ensure diversification and overall risk mitigation. If your goal is to earn higher returns over the long run and you also have a very high risk appetite, then you can consider investing in equity mutual funds.
What is an equity mutual fund?
An equity mutual fund is an open ended scheme that invests the majority of its investible corpus in equity and equity related instruments of publicly listed companies. Of its total assets, an equity mutual fund may investment anywhere between 65% to 80% in equity oriented securities like stocks. Since the majority of the portfolio takes exposure to the equity markets, investors must consider equity funds only if they have a very high risk appetite.
Can you invest in equity funds through lump-sum investing?
There are two simple ways in which investors can invest in equity mutual funds – either by making a one-time lumpsum investment or through a Systematic Investment Plan. Lump-sum investing is possible in mutual funds and it is probably the only way to invest in any other type of investment scheme as well. Lump-sum is the oldest way to invest in any investment avenues and has been the go-to investment method for many years now. If you are making a lump-sum investment invest in equity funds you have the leeway to buy more units at the scheme’s current Net Asset Value (NAV). However, there are no restrictions where one must only invest once in equity funds via lump-sum. As long as you remain invested, you can continue to invest through a lump-sum amount. However, if you are making a lump-sum investment do remember that you will end up exposing your entire investment amount to the market volatility right at the beginning of the investment cycle.
What is SIP? Can you invest in equity funds via SIP?
In most scenarios what happens is that one does not have a hefty sum to invest in an equity fund. Say you want to invest Rs 10 Lacs in an equity fund, but you will need this money say after 10 years, but you do not have the entire sum to begin your investment journey. What you can do is that you can instead opt for the Systematic Investment Plan.
A SIP is a simple yet effective way to grow your investment corpus over the long term. It involves the investor investing a fixed sum periodically in a mutual fund scheme till his or her investment objective is accomplished. Taking the above example, if you had to invest Rs 10 Lacs in an equity fund for a financial goal that you need to achieve in the next 10 years, you can start a monthly SIP of Rs 8500 and assume the equity scheme to offer an average of 10% returns, at the end of your investment horizon you would have accumulated a corpus worth Rs 17.4 Lacs (total invested sum(Rs10.20 Lacs) + interest earned (Rs 7.2Lacs)). Thus, by investing in mutual funds via SIP not only can you grow your corpus without investing large sums, but you can also earn decent interest over the long term.