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Benefits of investing in equity mutual funds for long-term wealth creation

“Patience is bitter, but its fruit is sweet”, is a popular saying that can be applied to various aspects of your life, including equity mutual fund investments. Waiting patiently for your invested funds to compound and generate wealth might appear as a frustrating task when you begin with market investments. However, the longer your investment horizon, the sweeter the fruit you reap.

Discussed here are some important benefits of remaining invested for the long-term in equity funds.  

Compounding effect

The power of compounding is an important benefit of investing in equity funds for the long term. The returns you generate on your equity investments are reinvested along with the capital. This substantially enhances the value of your investment over time and assists you to form a huge corpus by the end of the investment tenure. The longer you remain invested, the higher returns you generate owing to the power of compounding.

Reduced risk

A long investment tenure assists you to ride through the short-term market volatilities. Opting for long term investment tenure offers your invested money adequate time to recoup from short-term market volatilities, if any, and grow over time.

Tax savings

Long term equity mutual fund investments can assist you in tax planning. Note that the capital gains you generate are taxed as per LTCG (long term capital gains) and STCG (short-term capital gains). LTCG tax on equity of up to Rs 1 lakh in a financial year is tax exempt while gains of over Rs 1 lakh in a financial year levies a tax of 10 per cent on gains. In contrast, in the case of STCG tax on equity funds, a flat 15 per cent on capital gains is charged. So, the tax levied on long term gains are comparatively lower than short term capital gain tax.

Lower investment burden

SIP (systematic investment plan) is a prudent route using which you can invest in equity funds for the long term without the dilemma of timing your investments as per the market movements. With SIP, you can invest periodically in equity funds a specific amount on a particular date. As SIP invests your investible fund periodically, it allows you to get the benefit of rupee cost averaging. Cost averaging benefit allows you to purchase higher mutual fund units during bearish market phases and lower mutual fund units during bullish market phases, which helps to average out your investment cost.

Ideal to build your post-retirement corpus

A long-term investment in equity mutual fund serves as an excellent route to plan out your golden years. Equity funds are ideal for retirement planning because equity as an asset class holds the potential to outperform inflation and fixed income instruments by a wide margin over the long term.

Ending note

Long term investment in the market, particularly in equity mutual funds, helps you to tackle market volatilities and build adequate corpus for your distinct long term financial goals including retirement. Note that, as long as you invest in equity mutual fund schemes that match your risk appetite, you may expect to attain your target within the stipulated time period.