Equity MF best suited for long-term goals

Most investment advisors recommend looking for equity-oriented investments when the goal is of long-term. There are ample avenues to reach a corpus but to generate real rate of return it has to beat the inflation which is a discounting factor.

So, while fixed income avenues like bank FDs, etc. seem to create corpus over periods of time, they could actually turn negative when we discount the inflation rate. Arguably, equity is the only proven investment avenue that has consistently beaten the inflation in the past across long periods of time.

Though equity is a great compounder it's also riddled with risk, the risk of volatility. Unlike the fixed income instruments, the returns from the equity-oriented instruments are not consistent and fluctuate according to the prevailing market conditions.

This thus becomes a conundrum for investors pursuing higher returns have to take a bit of risk into their portfolios. But, a measured risk and thus a proportionate equity exposure to that of the risk appetite has worked wonders for the investor's portfolios.

Despite the higher attractive returns from equity, investors are constantly riddled with which of those in the equity that helps them to build wealth.

There are stories of investors who have not only earned lesser returns but also lost the capital in partial or entirety while betting on wrong stocks.

Also, when the equity markets are in turmoil, they would trample even the best of the stocks and so impart losses to the investors.

This plays abundantly on the investor psyche for investing in stock markets as the market gyrations upset the rhythm of the investor. Even for rational investors, the markets behavior would turn out to be intolerable, at times.

So, most of individuals equate equity investment with risk (particularly as loss of capital) than the super high real returns they provide for long-term investors.

These characteristics also make investors feel that investing in equity requires special skills, higher knowledge and complex understanding. But the fact is the simpler the form of investing the better are the returns.

So, how to achieve better returns at higher risk-to-reward while investing in equities. Mutual Fund (MF) is an answer to these questions. An equity MF is a blessing for the novice and seasoned investors for not just the simplicity of investing in equity but also one of the most economical way of wealth creation.

Of course, there are multiple types of equity MFs in the market but it's not that difficult to maneuver through this apparent maze. The key to success of investing in equity MF lies within.

The beauty of MF investment is that it primarily negates some of the very risks that equities are associated with. When one invests the entire corpus in a particular stock, the fortunes of the investment depends upon the rise or fall that stock.

It means a steep rise or fall could ultimately create or destroy wealth creation. Equity MF creates a portfolio of stocks where each of the stocks have a limit so that a skewedness is avoided.

It's helpful during the volatile times when a stock or few stocks could entirely derail the overall investment. A portfolio thus creates a buffer against any volatility and diversifies risk.

Another important feature of equity MF is the Systematic Investment Plan (SIP) option, where a pre-defined amount is deducted from the bank to be invested in the market regularly.

This assists in investor to make purchases of the assets (equity units) at various points of time irrespective of the market condition achieving rupee-cost averaging of the investment. invariably, this also brings the most desired discipline of investing in equity markets which benefits in the long run.

The first and foremost the investors have to do is to check for their risk tolerance. This helps them to understand what kind of funds suit them and then check for the fund objective to arrive at the right one.

Each equity MF comes with a fund objective which broadly defines the philosophy of the fund and how it would interact with the market. It gives an outline of how the fund executes its strategy in dealing with the market dynamics.

It also gives an idea for the investor the timelines to spend with the fund. For better benefit, investors are advised to create a portfolio that suits various needs and stay invested in equity MFs through the thick and thin of the market conditions by opting for SIP.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at [email protected])