Are you looking for inflation-beating returns? Do you seek an investment that may help you achieve your long-term financial goals? You may consider diversifying your portfolio with equity funds. It invests in stocks of companies depending on the investment objectives of the mutual fund. However, you may consider investing in equity funds only if it matches your investment objectives and risk tolerance. You must invest in equity funds for the long-term to maximise your returns. Let’s take a look at how early equity investments may power your future.
What are equity funds?
Equity funds invest predominantly in shares of different companies across market capitalisation. It may have a higher risk as compared to debt funds. You have a variety of equity funds that are classified according to their investment objectives.
You may choose the equity fund that matches your financial goals, investment horizon and risk profile. You could consider putting money in tax-saving mutual funds called equity-linked savings scheme or ELSS. It invests mainly in stocks and qualifies for a tax deduction up to a maximum of Rs 1.5 lakh per year, under Section 80C of the Income Tax Act, 1961.
Why invest in equity funds at an early age?
You could consider investing in equity funds at an early age to achieve your long-term financial goals, such as buying a house. You may have the ability to bear a higher risk for a greater return from your investments.
You may invest in equity funds to enjoy the benefits of the power of compounding at a young age. It is the reinvestment of earnings at the same rate of return to continually grow the principal amount over some time. Power of compounding has the potential to grow your wealth exponentially over some time.
How early equity investments power your future?
You could enjoy the benefit of the power of compounding if you invest in equity funds when you are young. It helps you earn returns on your principal investment and also on the returns generated by that investment.
You could invest in equity funds through a systematic investment plan or SIP. It is a way of investing in mutual funds which helps you avoid timing the stock market.
SIP inculcates discipline as you regularly invest in a mutual fund scheme. You get the benefit of rupee cost averaging. It is averaging out the cost of your mutual fund investment over some time. You can procure more equity fund units when stock markets are falling, and lesser units when stock markets rise.
Let’s understand the power of compounding benefit with an example. Suppose you invest Rs 5,000 a month in an equity mutual fund scheme. You expect to earn a return of 10% per year from your investment. The table below shows how your investment grows over time.
| Year | Amount Invested (Rs) | Expected Amount (Rs) | Wealth Gain (Rs) |
| 5 | 3,00,000 | 3,90,000 | 90,000 |
| 10 | 6,00,000 | 10,33,000 | 4,33,000 |
| 15 | 9,00,000 | 20,90,000 | 11,90,000 |
| 20 | 12,00,000 | 38,28,000 | 26,28,000 |
| 25 | 15,00,000 | 66,89,000 | 51,89,000 |
| 30 | 18,00,000 | 1,14,00,000 | 96,00,000 |
This example shows you how the power of compounding grows your wealth over some time. You could consider using the ClearTax SIP Calculator to calculate returns from your monthly SIP investments. You must invest in equity funds from an early age to maximise your returns and benefit from the power of compounding.
You don’t need to earn a fat salary to start investing for your financial goals. You may consider the sound investment strategy of investing in equity funds at an early age. It helps you accumulate a huge corpus over time. You may invest in equity funds through the SIP to magnify the benefits of compounding. In a nutshell, you must invest in equity funds at an early age to achieve your long-term financial goals.
For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in
I write to make complicated financial topics, simple. Writing is my passion and I believe if you find the right words, it’s simple.
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