Equity markets have the potential to offer the highest possible returns. Some stocks even manage to generate 249% returns annually. Its rewarding nature is what makes the stock market one of the most favored investment avenues. Every year there are more and more investors trying their luck by investing in the equity market. However, very few consider the stock market’s ugly side while investing. Investors who invest beyond their risk appetite have the potential of losing their money to market volatility. Equity markets may be highly rewarding, but they carry the highest amount of investment risk too. Investing in direct equities paves the way for concentration risk. First time investors even make investment decisions in panic, the biggest rookie mistake which one should avoid.
However, if you do not have the penchant to generate returns by directly investing in the stock market, you can create long term wealth by investing in equity mutual funds.
What are equity mutual funds?
Equity mutual funds are a pool of professionally managed funds that invest in equity and equity related instruments of publicly listed companies. Of its total assets, an equity mutual fund invests at least 65% in stocks of publicly listed companies. Even if you consult a mutual fund expert, they will recommend you invest in equity mutual funds only if you have a very high risk appetite and a long term investment horizon. Wealth creation with equity mutual funds is only possible if you have a long investment tenure.
Starting your wealth creating journey with equity mutual funds
Now before we talk about how you can create wealth with equity mutual funds, we would like to first make it clear that unlike fixed income interest offering schemes, equity mutual funds do not guarantee returns. This means that if you invested a sum in an equity scheme, there is no guarantee that the scheme will perform. However, one cannot ignore the fact that no other investment avenue has generated returns as high as equity schemes. Historically, equity mutual funds have outperformed all other conventional investment avenues in the long run.
Several of the first time investors end up taking out their money from equity mutual funds just months after investing. That’s because they feel that the fund’s nature of constantly fluctuating with its performance is not a good sign for wealth creation. This is not true. For example, when the coronavirus pandemic put the entire world in lockdown, this affected the performance of equity mutual fund schemes. For several months, equity schemes were generating negative returns. A large chunk of investors, even though they were suffering losses, chose to withdraw their money from equity mutual funds. On the other hand, few investors saw this as an opportunity to buy more units as the NAV (Net Asset Value) of most of the schemes was low. Fast forward one year, all the underperforming schemes have corrected and are giving twice as many returns in 2021. This is why it is important to remain patient with your investments and allow the money to do the hard work for you.
If you are new to investing and are finding it difficult to save, you can start a SIP in equity mutual funds. Systematic Investment Plan is a simple and convenient tool that allows retail investors to save and invest fixed sums periodically in equity mutual funds. This is the best way to long term wealth creation as one can generate a commendable corpus by just investing small sums regularly in equity funds vis SIP.