Start Investing Early with Equity Funds

Start investing early with equity funds

Young people do not realize the importance of financial planning. In fact, a majority of the younger generation lacks money management. People are always complaining that they are not able to meet their needs with their monthly income. The real problem is that most individuals have got addicted to unwanted expenses like frequent shopping, eating at restaurants every alternate day, taking their personal vehicles to the office, etc. Those who are able to control their outflows with their inflows are automatically good at financial planning.

The first step of financial planning is understanding your short term and long term financial goals. Having a realistic set of goals is essential because then you get a clear idea about how much money you need for the initial investment and to make investments at regular intervals till your investment objective is achieved. Every individual’s risk appetite varies depending on certain factors like age, income, existing liabilities, etc. It is better to know your risk appetite as every investment scheme carries a different risk profile and the last thing you want is incur losses because you invested beyond your limits. If you are one of those who has zero risk appetite then you may have to settle with conservative schemes. But these conservative schemes that generally offer fixed interest rates that are relatively low. However, if you are someone who is young and aggressive and seeking market linked returns then you might consider investing in mutual funds.

What is a mutual fund?

Mutual funds are a pool of professionally managed funds where the fund manager buys or sells securities in accordance with the scheme’s investment objective. Fund houses usually collect money from investors sharing a common investment objective and invest this pool of funds across the Indian economy in money market instruments including equity, debt, corporate bonds, government securities, certificates of deposits, call money, treasury bills, etc.

SEBI, the regulator of mutual funds in our country describes them to be, “a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with the quantum of money invested by them. Investors of mutual funds are known as unitholders.”

What are equity mutual funds?

Mutual funds are further categorized based on certain unique attributes such as fund size, risk profile, asset allocation, investment strategy/objective, etc. Equity mutual funds are one such mutual fund category that are favorite among aggressive investors. Equity mutual funds, as the name suggests are those mutual funds that invest predominantly in equity and equity related instruments.

Why should one start investing early in equity funds?

Like most mutual fund investments, equity funds too need time to grow. Some equity funds don’t have a lock-in period like Axis Focused Fund while other funds like ELSS (Equity Linked Saving Scheme) come with a statutory three year lock in period. So when you are considering investing in equity mutual funds, it is better to have a long term investment horizon.

The earlier you start investing in equity funds, the more you can benefit from compounding. When you start investing early, you have more years in hand to continue with systematic investing. Also, if you start investing at an early stage in your life, you might inculcate the discipline or investing regularly. Those who have long term financial goals like early retirement to achieve, such individuals need at least 25 to 30 years in hand to build a desirable corpus. For such people, investing in equity funds from an early stage in their life may prove to be effective.

You can start investing in equity funds with a small amount via SIP. Systematic Investment Plan or SIP, is an easy and hassle free way of anyone who wishes to remain invested for the long run. With SIP, all one has to do is instruct their bank and every week on a predetermined date, a fixed amount is debited from your savings account and electronically transferred to the equity fund.

Those who have surplus cash parked with them can even make a lumpsum payment towards their equity funds. One good thing about lumpsum investment is that investors receive more number of equity fund units in quantum with the investment amount and depending on the fund’s existing NAV (net asset value).

These are some of the ways you can start investing in equity funds at an early stage in your life. However if you are new to mutual funds or investments in general then feel free to seek some professional help before investing.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.