Why Equity Mutual Funds for the Long Term?
Does your advisor keep telling you to invest in the equity funds if you have a long-term tenure? Have you noticed whenever it comes to investing in a longer tenure, the equities are highly recommended? Do you know the reason behind this? Let us help you understand the same.
Equity Funds - Meaning
To begin discovering the reasons why equity is preferable in the longer tenure, it is important to know what it is. The equity mutual fund is one of the categories in the mutual funds wherein the scheme invests primarily in the equity stocks and shares of the companies. The fund managers of these schemes analyse the companies across different sectors and then invest in the best equity instruments to gain capital growth. So now you must have got a clear idea about the equity funds.
Let’s understand the concept of equity now. Equity funds and equity are two different elements having diverse connotation.
Equity means ownership, i.e., if you hold equity shares of a company, you hold the ownership rights. With this, you become a partner of the company in sharing the profits and losses, and the growth of company leads your capital as well. But have you seen any business or company to have reached milestones in just two years of the establishment? Just ask yourself, if you start your own business, can you achieve your targets in just a month or a year. Same is the case with equities.
Being the owned capital of a business or a company, equity takes more time to flourish and reach the desired level of growth. So ideally, we must have patience and stay for a long time to earn riches on the invested capital in the equity stocks or shares. Although everyone knows about it, no one applies this in real life. After buying the equities for our portfolio, we start looking at their values from the very next day. Does it sound practical that today you park your money in the shares and the very next month or two months later, it gets doubled? We all know that it’s not possible. The same thing we have to understand and should be patient to achieve the desired growth.
Why Equity Delivers Growth in Long Run?
Good Companies Take Time to Sustain Their Success
It probably happens in the rare cases that a company reaches at its success level overnight. Most of the companies like Infosys, Microsoft, Tata Group have grown the wealth of their shareholders and have maintained the same pace over a long-term period.
It is almost similar to planting a tree where first we need to sow the seeds, then keep watering the plant to let it grow into a big tree. Then, after a considerable time period, when the tree becomes capacitated to produce fruits, you reap its benefits for long. What we learn from here is that we should be patient and remain focused to gain tremendous growth with stability over a period of time. The equity investment expects the same from its investors.
The Compounding Benefits
The equity investments are often called growth oriented because of the benefit of compound interest. The return earned on the equity diversified mutual fund are accumulated while fetching interest on interest to create a huge wealth over a longer tenure. Considering the BSE Sensex data for the past 33 years, the Indian equity market has gained the average compounded benefit of around 16% over its history. This means those who had invested in the equities during that period have gained huge wealth with the compounded returns.
Inflation-Adjusted Returns Creating Wealth
Although equities are prone to market fluctuations in the short term, they provide exceptionally greater returns faster than inflation shrinks them. This can be better analysed with the performance of Sensex and Nifty in the past few years where they were highly volatile and could not sustain their high indices. But, some of the equity investments have given much greater returns irrespective of such high fluctuations in the long tenure.
So, if you wish to make riches and earn wealth, then you have to give time to your equity investments. It has been rightly said that “Patience is the key element of success.” In the case of investments as well, it is of vital importance.
Instead of waiting for any right moment, you must begin your investment for wealth creation in the equity stocks now to reap the benefits in the long run. MySIPonline provides the best recommendations as per your risk appetite and goals, get associated with us to make the best choice for your portfolio.