Making the correct investment choice can be challenging as well as rewarding. One of the challenges most retail investors face is the dilemma between traditional investments and equity mutual funds. Equity funds are a market-linked investment option that permits you to take part in the stock market without purchasing the stocks directly. Such funds pool money from various retail investors to invest in a diversified stocks portfolio. The significance of equity funds depends on their potential to offer considerable returns over a long time period while disseminating the risk throughout distinct sectors and companies.
Now, let’s go through the comparative analysis between traditional investments such as public provident funds (PPF), fixed deposits and national savings certificates (NSC) and equity funds to assist you in making better decisions for your financial future.
Equity mutual funds vs. traditional investments –
Risk and diversification
Equity funds come with a specific degree of risk owing to market volatility. However, the risk is met by diversifying investments throughout distinct sectors and stocks. This diversification reduces the impact of poor performance by individual stocks.
Fixed deposits, PPF, and NSC are considered low-risk investments, making them suitable for conservative investors. However, the fixed returns offered by these options may not provide the desired wealth creation over time.
Returns on investment
Equity funds are highly known for their potential to yield high returns over a long time span. Though they are subject to market fluctuations, the past record suggests they have outperformed traditional investments such as NSC, PPF and fixed deposits on yielding inflation-beating returns.
Fixed deposit, PPF and NSC offer stable and fixed returns. While this can offer security, these returns often fail to generate inflation-beating returns leading to lower real returns over the long term.
Liquidity
Equity funds provide high liquidity meaning you can redeem your investment whenever the need arises. However, you need to note that there may be taxation implications and exit loads based on your investment duration.
The lock-in period in traditional investment products restricts access to funds for a specific number of years. While they do provide some liquidity options, premature withdrawal penalties may apply.
Ending note
Retail investors looking for a solid return that beats inflation must consider investing a major portion of their portfolio in equity funds. Though these funds come with certain risks, the rewards gained over the long term can be considerable.
The key to forming a pragmatic investment portfolio is diversification. Besides equity fund investments, consider investing a portion of your money in traditional options such as NSC, PPF, fixed deposit, etc. This investment mix can endow a balance between growth and stability, catering to your risk appetite and financial goals. In the case of any confusion, it is crucial to get in touch with a financial advisor. A certified financial advisor can guide you better and help form an investment portfolio as per your preference, financial goals, time horizon and risk appetite level.
