Building wealth with equity funds: A 15-year case study of ₹1 lakh SIPs

Everyone aspires to build wealth over the long term. One of the most effective ways to attain this is by investing regularly in equity mutual funds.

Over the past decade, these funds have consistently delivered strong returns, particularly for long-term retail investors. Discussed here are the basics of equity funds and a scenario—what happens when you invest ₹1 lakh every year via systematic investment plan (SIP) in equity funds for 15 years—and what it teaches about wealth creation.

What are equity mutual funds?

Equity mutual funds invest primarily in shares of companies listed on stock exchanges. They offer the potential for high long-term returns.

Unlike fixed-income options, equity funds are subject to market volatility, but they often outperform other asset classes over longer timeframes. This makes them a suitable choice for retail investors with a long-term investment time frame and the potential to tolerate moderate to high risk.

Equity funds come in various categories: large-cap, mid-cap, small-cap, and multi-cap. Each category has a different risk-return profile.

• Large-cap funds invest in well-established companies and show relatively lower market volatility.

• Mid-cap and small-cap funds target companies with high growth potential but carry more risk.

• Multi-cap funds invest across companies of different sizes, balancing growth with diversification.

The 15-year SIP case study

Consider an investor who begins an SIP of ₹8,334 per month (equivalent to ₹1 lakh annually) in an equity mutual fund. The investor continues this habit for 15 years, stays invested through market ups and downs, and earns an average annual return of 12%. Here, in this case, the estimated returns would be ₹24.66 lakh, with a total corpus of ₹39.66 lakh.

This growth is basically driven by the power of compounding and the discipline of systematic investing. Staying consistent, even during market downturns, is a key factor in achieving such results.

Why are equity mutual funds an excellent option within the mutual fund category?

Equity mutual funds are viewed among the best mutual fund options for long-term investment, particularly when invested via SIPs, because they offer:

• High growth potential: Historically, equity funds have delivered higher returns than most other investment avenues over the long run.

• Diversification: By investing in a wide basket of stocks, equity funds lower the impact of poor performance by any single stock.

• Disciplined investing: SIPs promote consistent investment habits. This helps investors avoid the pitfalls of market timing.

• Rupee cost averaging: SIPs automatically buy more units when the market is down and fewer when it is up, lowering the average cost per unit.

• Flexibility: Investors can start, pause, increase, or decrease their SIPs according to changing financial goals or income levels.

Conclusion

A 15-year SIP of ₹1 lakh annually in equity funds has the potential to turn modest investments into significant wealth. SIP in equity mutual funds not only offer attractive long-term returns but also instils discipline and makes wealth creation more achievable through consistent effort.

With the power of compounding and rupee cost averaging, SIPs help investors build a financially secure future and meet long-term goals.

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