Important things to know before investing in equity mutual funds

A lot of investors are fed up with the miniscule returns their current fixed interest schemes are offering. They have realized that such investments aren’t going to help them fetch any decent returns and they have to look for other investment avenues to target their life’s financial goals. These days, more and more people are turning to market linked schemes like equity mutual funds. People prefer investing in mutual funds than investing in direct equities for a lot of reasons. First of all, mutual funds offer active risk management, they invest in a diversified pool of securities and are known to mitigate investment risk over the long term.

If you too are planning on investing in equity mutual funds to create wealth over the long term, here are few things you should know –

Equity funds do not guarantee returns

In fact, no mutual fund scheme offers guaranteed returns. Whether it is equity funds, gold funds, debt funds, ETFs, or any other type of mutual fund investment product. One cannot expect mutual funds to offer fixed returns as these are market linked schemes whose performance highly depends on how its underlying portfolio of securities perform. Since equity mutual funds predominantly invest in company stocks and other equity related instruments, they carry a high risk rewards tradeoff. This means that although there are chances of you earning decent returns over the long term, your investments are constantly exposed to market volatility. Investors cannot expect same returns every year and investors should accept this variability from time to time.

Equity funds are ideal for long term investment

We have already established that the underlying pool of assets of an equity mutual fund is prone to market volatility. This makes equity mutual funds extremely volatile over the short term. And this is exactly why investors are expected to remain invested in equity mutual funds for at least 7 to 10 years. In fact, if possible, investors must try and continue investing in mutual funds for the longest time possible to allow they money to multiply and snowball into a commendable corpus. What happens when you invest for a longer duration you are able to benefit from volatile markets and this also allows you to target your long term financial goals.

SIP investment option

If you are a first time investor, you can start a monthly SIP in any mutual fund scheme without having a large investment corpus at your disposal. Systematic Investment Plan (SIP) is an investment method where you get to invest small fixed amounts at regular intervals in any mutual fund scheme of your choice. Investors can also refer to SIP calculator to determine the sum they need to invest regularly in order to achieve the desired corpus. Since you are going to remain invested in equity funds for the long haul, automating your SIPs will save you from the hassles of manual investing.

Investors can switch anytime

If you are unhappy with the equity mutual fund which you have invested, you can immediately stop your investments. Investors are free to switch to another equity mutual fund scheme without any prior notice to the AMC. This kind of switching is easier when you are using a third party application to invest in mutual funds where you have the privilege to invest in mutual funds offered by different AMCs. There are no cancellation fees involved and investors can easily switch to another equity scheme which is more suitable for their investment goals.

Investors are expected to track the performance of their equity mutual fund portfolio from time to time so that they can maintain the hygiene and ensure that they are investing in schemes that have the potential to help them with their financial goals.

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