This is a guest post authored by the research team at Quantum Mutual Fund. It is one of India’s premier asset management companies with 1,440.45 Cr of Assets under Management as of 30th June 2020.
In times when inflation is eroding the purchasing power of our hard-earned money, making a productive investment is necessary. Equity as an asset class has the ability to counter inflation over the long run and outperform most others, provided a prudent approach is followed.
These are the two most common ways of investing in equities:
1/ Direct i.e. through stocks
2/ Through equity-oriented mutual funds
While investing directly in stocks, evaluating a host of fundamental and technical aspects is a must! However, not everyone possesses the needed expertise and understanding of these facets of stock picking. Even if one has the ability to understand the direct equity route, they may not be able to devote much time to investment research.
This is where equity-oriented mutual funds provide the much-needed ease to invest in equity as an asset class.
Here are five key benefits of investing in equity-oriented mutual funds:
1/ Provides a fair degree of diversification
When you buy stocks, you are investing in a few selected companies. With Mutual funds, you get exposure to as many as 50-100 companies, depending on the scheme you choose.
Besides, through mutual funds, you can diversify the portfolio across market capitalization, investment instruments and styles.
This diversification, which is one of the basic tenets of investing, helps to limit the downside risk better, as opposed to holding a handful of stocks in your investment portfolio.
2/ Availability of choices
There are 10 sub-categories of open-ended equity-oriented mutual funds:
- Large-cap Fund
- Large & Midcap Fund
- Midcap Fund
- Small-cap Fund
- Multi cap Fund
- Dividend Yield Fund
- Value/Contra Fund
- Focused Fund
- Sectoral/Thematic Fund
- ELSS (Equity Linked Savings Scheme)
Each of these has distinctive characteristics defined by the capital market regulator and meant for a certain level of risk profile and investment time horizon.
With the help of an investment advisor, you can choose the schemes which are best suited for you and customize it to align with your personal risk profile, investment objectives, financial goals, and the time horizon to fulfil the financial goal.
3/ Economies of scale
A stock’s price may range from a few hundred to a few thousand. Moreover, you would have to buy multiple shares of different companies to get the maximum benefit. Your total investment may run-up to a few lakh Rupees, with stocks of very few companies in hand. And by buying a handful of stocks, you lose out on the economies of scale.
On the other hand, you can start investing in equity-oriented mutual funds with as low as Rs 500, thus enjoying benefits of diversification, better economies of scale and keeping the cost of investing low.
4/ Professionally managed with proper research
Mutual funds are professionally managed by proficient fund managers and their team who hold wide experience and expertise in the capital markets. Plus, most fund houses follow robust investment processes and systems.
Based on the investment objective of a particular mutual fund scheme, the fund manager/s select stocks for the scheme’s portfolio backed by thorough research – analyzing various micro and macro parameters – so that you earn a reasonable return and the stated investment objective of the scheme is achieved.
All you have to do as an investor is to select suitable mutual fund schemes and add them to your investment portfolio to reap the sweet fruit of efficient inflation-adjusted returns in the long-term (rather than investing in an ad hoc manner, which may jeopardize wealth creation).
5/ Disciplined and diligent approach
To subscribe to the good habit of investing in equities regularly and systemically, investors may opt to invest via the SIP route. SIP (Systematic Investment Plan) in equity-oriented mutual funds inculcates the needed discipline and diligence in the journey of wealth creation.
How do SIPs help in systematic wealth creation?
The rupee-cost averaging feature of SIPs helps mitigate the volatility while you endeavour to compound hard-earned money over the long-term investment horizon.
SIPs average out the cost of purchases through the systematic and regular purchase of mutual fund units. When the market goes up, you buy fewer mutual fund units against the SIP instalment. In a corrective or bear market, you buy more units that potentially would earn better returns in the long run.
Here are five key benefits of SIP-ping into mutual funds:
1/ Easy on the wallet (You can invest in smaller amounts at regular intervals)
2/ Enables rupee-cost averaging (the shocks of a volatile equity market are reduced)
3/ Makes timing the market irrelevant (which can prove hazardous to wealth and health)
4/ Facilitates power of compounding (to multiply hard-earned money)
5/ Effective medium of goal planning (to help you plan for long-term financial goals)
SIP-ping into worthy equity-oriented mutual fund schemes is a rewarding strategy in itself. It is a mode of Investing that instils financial discipline.
Always bear in mind that when it comes to equity investing and wealth creation, what matters most is ‘time in the market’ and not ‘timing the market’.
Starting a monthly SIP in an equity-oriented mutual fund at an early age and investing regularly for the long term can help generate wealth and accomplish your financial goals.
Ideally, make your payday your SIP day, and as you get annual increments step-up your SIP instalments.
There are two ways you can step-up SIPs:
1/ By a fixed rupee-basis each year. So, say you have a monthly SIP of Rs 10,000, you can increase this amount every year by Rs 1,000 or Rs 2,000 as per your requirement; or
2/ By a fixed percentage basis each year, say by adding 10%-20%, to your current monthly SIP year- after-year.
There are two key benefits of stepping-up your SIP instalment:
1/ Potential to counter inflation
2/ Helps build a bigger corpus
If you are disciplined in the journey of wealth creation, you may be able to counter inflation effectively in the long term.
Recognizing that the path to wealth creation through equities and equity-oriented mutual funds is volatile, SIPs would work well for you. Make volatility your friend by SIP-ping into equity mutual funds.
The opinions expressed are those of the authors and should not be construed as advice from Kuvera.
Disclaimer, Statutory Details & Risk Factors:
The views expressed herein this article/video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide/investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.
Risk Factors: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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