Why does it make sense to invest in Mutual Funds for the Long term?
The ideal investment instrument for ordinary investors with little to no experience managing investments is a mutual fund. Mutual funds have performed well over time, withstanding the test of time in risk management and generating superior returns. Even with the caveat that prior success may or may not be duplicated, the funds' historical performance has remained strong. The good news is that, despite repeatedly printing the disclaimer and presenting the performance of the funds, we thankfully did not experience as significant a performance shortfall as one might have feared. The majority of the time, it has consistently maintained positive double-digit returns. This would imply that the fund's performance has been able to outperform taxes and inflation to produce what is known as the "Real Return."
Most long-term investments will have some good numbers. But that's insufficient. They must be in the black after accounting for taxes and inflation.
Real Return = Return on Investment - Inflation - Taxes.
For instance: if you've held a 5-year FD at a 7% annual return. If you assume that inflation will be 5% per year on average during these five years and that you are in the 30% tax bracket
your real income will be = 7 - 5 - 2.1 (7 * 30%) = - 0.10%
However, if you had invested in a mutual fund plan for five years with an average return of 10% per annum, the real return would have looked substantially different.Since the inflation rate is the same but taxes are different when compared to FD as long-term investments are subject to only a 10% tax. So the equation will look like this
your real income will be = 10 - 5 - 0.7 (7 * 10%) = + 4.30%
So investors should be more concerned about real return rather than return on Investment. This is the way to build wealth in the long run
Check out the actual performance of some of the funds shown in the table below
| Fund Name | SIP Amount | months | Invested value | Fund value | Absolute return | Ann Return |
|---|---|---|---|---|---|---|
| Nippon Smallcap | 10,000 | 120 | 1,200,000 | 4,298,570 | 358% | 24.18% |
| SBI Small Cap | 10,000 | 120 | 1,200,000 | 4,247,221 | 354% | 23.85% |
| Mirae Emerging | 10,000 | 120 | 1,200,000 | 3,553,069 | 296% | 20.47% |
| Axis Midcap | 10,000 | 120 | 1,200,000 | 3,028,325 | 252% | 17.60% |
| SBI focused | 10,000 | 120 | 1,200,000 | 2,669,973 | 222% | 15.26% |
| ICICI Bluechip | 10,000 | 120 | 1,200,000 | 2,577,024 | 215% | 14.53% |
Disclaimer: Past performance may or may not be repeated in the future. This is for illustration purposes only
So make your judgment and start your investment wisely
Happy Investing
Team Compositedge