Equities are great compounding machines; however, their importance is appreciated only by a small number of investors. Even the young investors, having well-paying jobs and no near-term goals fear making investments in equities. The risk in equity investment decreases substantially if the investment period is long. It makes no sense to invest money for 20 years in fixed deposit as it shall hardly beat the inflation and shall lose value.
It has been rightly said that
Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.
What are you losing?
The most important point in reaching a destination is to choose the right path. Let us find out what you shall be losing because of not making the right investment decision. Let us assume you are investing 20000 per month in a fixed deposit for your retirement or a long-term goal that is 20-25 years away. You are getting 6% (after tax) annual interest. Your friend Mr. Market is also investing Rs. 20000 per month in a mutual fund for the same long-term goal. The value of investment shall be as under
| Period | Your investment in a Fixed deposit (earning 6% after tax) | Mr. Market’s investment in Mutual Funds (earning 12%) | Mr. Market’s investment in Mutual Funds (earning 14%) |
|---|---|---|---|
| 10 years | 32.78 lacs | 46.01 lacs | 51.81 lacs |
| 15 years | 58.16 lacs | 99.92 lacs | 1.21 Cr |
| 20 years | 92.41 lacs | 1.98 Cr | 2.60 Cr |
| 25 years | 1.39 Cr | 3.76 Cr | 5.39 Cr |
The return on equities is assumed conservatively at 12% to 14%.
Too Hard to believe?
Let me share with you some examples of mutual funds where
investors have made fortunes by staying invested for long terms. The mutual
funds we shall discuss are for educational purposes only and in no way a recommendation
to invest in the fund. These mutual funds have been chosen based on their long
track record.
Nippon India Growth Fund (Formerly Reliance Growth Fund)
The fund belongs to the “Large & Midcap” Category and was
started in 1995 by Reliance Mutual Fund (Now Nippon India Mutual fund). An amount of Rs. 1.00 lacs invested in the
fund has grown 100 times into 1.00 Cr in 22 years and guess what the story
doesn’t end here. The value of the investment has grown 200 times to Rs. 2.00
Cr in 26 years.
That’s the power of compounding. The Journey from 1.00 Cr to 2.00
Cr has taken just 4 years. But very few
investors can see through such a long period and remain invested. That’s why we
are recommending equities for long-term goals.
The below chart shows the annualized returns of the fund for various tenures as of 06.05.2022.
| Tenure | Annualized Return (%) Lumpsum | Annualized Return (%) SIP |
|---|---|---|
| 1 year | 20.55 | 0.7 |
| 2 years | 47.28 | 27.83 |
| 5 Years | 13.94 | 18.8 |
| 10 year | 16.47 | 16.69 |
| Since Inception | 21.9 | - |
Source: Moneycontrol
The annualized return (as of 06.05.2022) of some of the other oldest equity mutual fund schemes is as under:
| Scheme | Inception date | Annualized return |
|---|---|---|
| Franklin India Blue Chip Fund | 01.12.1993 | 19.35 |
| Franklin India Prima Fund | 01.12.1993 | 18.81 |
| HDFC Flexicap Fund | 01.01.1995 | 18.29 |
| ABSL Flexicap Fund | 27.08.1998 | 21.68 |
| SBI Large & Mid cap fund | 25.05.2005 | 17.35 |
Source: Moneycontrol
From the above tables, it is evident that in longer tenures the equities perform better than any other asset class and risk decreases substantially in longer tenure. Hence mutual fund investment is best to achieve long-term goals.
So what are you waiting for?
Consult your financial advisor and start your investment journey
today. A wise man has rightly said
The best time to plant a tree was 20 years ago. The second best time is now.
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Disclaimer: These mutual fund schemes discussed in the article are for informative purposes only. The investors shall consult their financial advisors before making investment decisions.
Sources
https://www.moneycontrol.com/mutual-funds/nav/nippon-india-growth-fund-retail-plan/MRC008
https://www.moneycontrol.com/mutual-funds/nav/franklin-india-bluechip-fund/MKP001
https://www.moneycontrol.com/mutual-funds/nav/sbi-large-midcap-fund/MSB003
https://www.moneycontrol.com/mutual-funds/nav/aditya-birla-sun-life-flexi-cap-fund/MAC006
https://www.moneycontrol.com/mutual-funds/nav/franklin-india-prima-fund/MKP002
https://www.moneycontrol.com/mutual-funds/nav/hdfc-flexi-cap-fund-regular-plan-/MZU001
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