How Mutual Funds can help in Wealth Creation?

Owing to the gamut of benefits and flexibility they offer; mutual funds have emerged as one of the most popular investment options among the Indian investors. Most financial advisors recommend investing in mutual funds for creating a long-term corpus, given the wide range of schemes available across the asset classes for different types of investors.Further, with the Systematic Investment Plan (SIP), mutual funds allow the investors to make regular and disciplined contributions towards long-term wealth creation easily and conveniently.

Historically, it has been observed that the equity markets have provided very good returns to the investors who’ve stayed invested in it for a long period of time. For example, despite several ups and downs in the market during last 40 years, S&P BSE Sensex has been able to deliver about 16% annualised returns to its investors.Going by the calculation, Rs. 1 lakh invested in this benchmark fund in the year 1979 would have become approximately Rs. 4 crores on the current date, appreciating by almost 400 times in 40 years. That’s how the power of equity can help an investor create a substantial amount of wealth over the long term.

The SIP mode of investing in mutual funds helps the investors sail through the emotional bias and they continue to make periodic investments despite the market conditions. This enables them to enjoy the benefits of rupee cost averaging by buying more units at a time when the market is down and lesser units when the market is up.As a result, an investor is able to generate a large amount of corpus over the years, overcoming the effect of market volatility on the investments.

Equity mutual funds are considered an ideal investment avenue for achieving inflation beating returns in the long run. Compared to the other popular investment tools such as bank’s Fixed Deposits (FDs), gold, or Public Provident Fund (PPF), equity mutual funds have been able to deliver better returns in the range of 12 to 15 percent during the past 10 to 20 years.Therefore, investments made in equity funds for a long term, say 15 to 20 years, have the capability to deliver higher returns than other investment instruments offering fixed returns. This helps an investor to grow his/her wealth by multiple times in the long run.

To create long-term wealth through mutual funds, the focus should be on ‘time in the market’ rather than ‘timing the market’. When an investor starts investing at an early age, he/she is able to reap the benefits of compounding in a more efficient manner as the investments continue to appreciate over a prolonged period, thereby helping in accumulation of a substantial corpus.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.