Bank Fixed Deposits, Post Office Small Savings Schemes, life insurance policies, gold, land and property are the traditional savings and investment avenues for investors in India. Some of these asset classes are risk free or low risk, while other asset classes are risky. However, as far as wealth creation is concerned, historical data shows that equity is the best asset class in the long term. Various schemes of Mutual Funds India provide average retail investors with an excellent avenue of participating in wealth creation through equity investments.


Investors should know that equity is a risky asset class, but the risk of making a loss reduces significantly over a long investment horizon. Historical data also suggests that equity is the asset class which has consistently been able to beat inflation over a sufficiently long tenure.


In India equity is also one of the most tax friendly asset classes. Short term capital gains (investment holding period of less than 12 months) in shares and equity mutual funds India are taxed at 15%. Long term capital gains (investment holding period of more than 12 months) in shares and equity mutual funds is taxed at 10% only if the total long term capital gain in a financial year is above Rs 1.00 Lakh. Dividends paid by equity mutual funds are totally tax free in the hands of the investor, but the AMC has to pay dividend distribution tax (DDT) of 10%.


However, what makes equity the most attractive asset class is its long term returns relative to other asset classes. Rs 1 lakh invested in the NIFTY 50 Index (TRI) in 1998would have grown to nearly Rs 12 lakhs in 20 years. The same amount of money invested in gold and bank fixed deposits would have grown to just Rs 7.16 lakhs and Rs 3.73 lakhs in 20 years.


Now if you had invested the same money (Rs 1 Lakh) in a top performing diversified equity mutual fund scheme, you could have got even better than NIFTY 50 TRI returns in the last 20 years - In a top equity mutual fund scheme like HDFC Equity Fund, your investment would have multiplied over 60 times!


Why are good mutual funds able to beat Sensex or other market benchmarks?


Mutual funds in India are managed by professional fund managers and one of their main objectives is to beat the market benchmark through their stock selection and portfolio management. Mutual funds also diversify investment risks by investing in a portfolio of stocks across different sectors. By investing in a sufficiently large number of stocks, mutual fund schemes are able to diversify company specific risk (risk of a company not performing well financially and as a result, see a fall in its share price).


By investing across different sectors, mutual funds are also able to diversify sector risk (risk of a sector underperforming due to change in Government policies, RBI policies or other macro-economic developments) to a large extent. Though mutual funds are subjected primarily to market risks but their performance is very transparent and you can compare the returns of various schemes on mutual fund research websites.


Mutual funds are convenient investment options for retail investors. You do not need to have a large sum of money to invest in mutual funds. The minimum amount required to make a lump sum investment in most mutual fund schemes is just Rs 5,000.


You can check the lump sum returns of mutual funds schemes in India here.


The best feature of mutual fund investments is Systematic Investment Plans (SIPs). Through SIP you can invest a small amount of money every month (or any other frequency) in a mutual fund scheme. Through systematic investing over a long time period, you can accumulate a substantial amount of wealth, through the power of compounding. Power of compounding is the ability to generate profit on profits. Through systematic investing you can also take advantage of equity market volatility to average out the purchase price. Rupee cost averaging can generate superior returns for investors in the long term.


You can check the SIP returns of mutual funds schemes in India here.


Conclusion


Equity Schemes of Mutual Funds India are undoubtedly the best asset class for wealth creation in the long term. We discussed earlier that equity mutual funds are among the most tax friendly investment options in India, their performance is very transparent and very flexible. Most open ended funds (with the exception of ELSS and some other specific schemes) can be redeemed at any time; if you redeem within the exit load period (usually 12 to 24 months for equity schemes) then a penalty called exit load (usually 1 to 2%) will apply. The best benefits of mutual funds are, however, seen over a long investment period. You can invest in mutual funds for a variety of long term financial goals like children’s education, marriage, retirement planning or simply wealth creation.


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