Factors to consider when investing in equity mutual funds

Factors to consider when investing in equity mutual funds

By Vikas Mathur

The mutual fund industry in India has witnessed a remarkable growth in the past two decades, and particularly equity funds have gained significant popularity among the retail investors. As AMFI reports, we have recorded around 5 fold increase in the last 10 years and the AUM of the Indian MF Industry has grown from Rs. 8.68 trillion as on May 31, 2013 to Rs. 43.20 trillion as on May 31, 2023. If we look at the historical performance, several equity mutual fund schemes have brought in compounded annualised returns in double digits in the last decade.

Time horizon and financial goals

We all have a variety of financial goals at different junctures in life. For instance, short term goals at 20, 25 & 30 years of age may vary as buying the latest mobile phone, a swanky car and upgrading professional skills respectively. Likewise medium term goals may include buying/constructing a house, repayment of a home loan, building a substantial emergency fund, funding the child’s school education etc.; and long term goals may include kid’s higher education & wedding and building a retirement corpus. The goals could be many more as per the individual’s needs.

As the time frame of the investment varies so should the portfolio nature. As a rule of thumb, equity investments are ideal for long term investments. Larger the time frame, more aggressive could be the portfolio. For investment plans beyond 7 to 8 years, have maximum SIPs in equity funds, as for short to medium term duration pick a mix of equity, debt & gold funds. Here the idea is to diversify portfolio risk by letting in more asset classes. Mutual fund investments are market linked pooled investments and have potential to grow the wealth in long term. However, there is always an ingrained risk of capital loss in the short to medium term. Thus, it is important to not time the markets and continue SIPs with discipline. Despite volatility in markets one must stay invested as per their goals and time horizon.There is no one size fits all advice. Basis your own capacity to take this market risk, you should choose the funds’ category for portfolio. An aggressive investor should choose equity schemes, while, the one with low to moderate risk appetite, should add debt and balanced funds in the portfolio along equity funds.

Know the power of compounding for wealth creation

When we talk about mutual fund investments, the power of compounding is one of the most effective pillars of wealth creation. When you begin your SIP, each month you re-invest the compounded interest along the principal and with compounding factoring in, your investments begin to grow exponentially over the years rather than linearly. This can be understood best with an example. When a 20 years old starts SIPs worth Rs 5000 monthly and continues investment till the age of 60 years, he will build a corpus over 3 crores, subject to moderate annual growth of 12% p.a. In contrast, when a 40 years old decides to start SIP of the double amount, i.e. Rs 10,000 per month, s/he will build a corpus slightly less than Rs 1 crore at 60 years of age, at annual yield of 12% p.a. To enjoy the compounding benefit, s/he needs to wait for more years!!

SIP of Rs 5000 starting at the age of 20 years, yield of 12% p.a.:AgeTotal Corpus25 yearsRs 4,12,43230 yearsRs 11,61,69540 yearsRs 25,22,88045 yearsRs 49,95,74050 yearsRs 94,88,17555 yearsRs 1,76,49,56960 years₹3,24,76,345SIP of Rs 10,000 starting at the age of 40 years, yield of 12% p.a.: AgeTotal Corpus45 yearsRs 6,18,34850 yearsRs 23,23,39155 yearsRs 50,45,76060 yearsRs 99,91,479

Yet, it is never far too late to enter the markets. If you decide to start investments at 40 years or beyond, opt for a mix of SIP as well as lump sum investment route, particularly during market corrections. Make sure to increase your SIP amount annually to beat the inflation and review & rebalance your portfolio regularly

All in all, Investing in equity mutual funds is an excellent way to participate in the potential growth at the bourses, while enjoying the benefits of diversification and professional fund management. However, before investing your hard-earned money, it is crucial to consider these factors and make informed decisions.

(Vikas Mathur,Head- Strategic Partnerships, Religare Broking. Views expressed are the author’s own. Please consult your financial advisor before investing.)