Understanding the impact of your investments can be a game-changer in the context of achieving financial independence. Here’s a list of ways mutual funds help achieve financial independence:
Get an early start
One of the golden principles of wealth creation is time. The more time your investment has to grow, the greater your corpus. Investing in mutual funds early gives you the perfect opportunity to optimise the effect of compounding on your funds. Under the power of compounding, your investment generates returns which are reinvested to result in potentially exponential growth over time. Maximising this compounding effect helps you achieve financial freedom early.
Set clear goals for your investment
To achieve financial independence through mutual funds, you have to follow a disciplined approach. Mutual fund investments offer a versatile route to build wealth and fulfil different investment objectives. However, to unleash the full potential of MFs, you need to set clear investment goals. Before investing in mutual funds, you need to ascertain why you are investing. Outlining a purpose for your investments offers both motivation and direction. Setting clear goals helps you estimate the target amount needed to fulfil the goal within your selected timeframe. In other words, you understand your time horizon as well to curate a tailored approach.
Invest consistently via SIPs
Consistently plays a vital role when it comes to achieving financial independence early. Investing in mutual funds through the SIP (systematic investment plan) route helps you achieve this consistency. SIPs help you stick to a long-term investment plan and make fixed contributions at regular intervals. This disciplined approach helps maximise the power of compounding and avoid pitfalls of timing the market. Moreover, you can start SIPs in most mutual fund schemes with a nominal contribution of Rs. 500/month. This makes mutual funds a much more accessible investment option for achieving financial independence, especially compared to other options that demand high minimum investments. It has opened doors for market-linked investments to different investors, even ones with limited income.
Build a retirement corpus
Investing in mutual funds is crucial for maintaining financial independence throughout your retirement years. Owing to their compounding benefits, MF investments help you build a secured financial future. Starting early helps you weather short-term volatility to lock-in long-term gains. For instance, equity mutual funds experience intense short-term volatility but offer good returns over the long-term. By remaining invested for a long-term horizon, you can build a substantial corpus overtime to ensure comfortable post-retirement years with zero compromises to your lifestyle. Therefore, if you wish to achieve such financial independence through mutual funds, start investing today.
Tap into tax benefits
Achieving financial independence through mutual fund investments brings with it certain tax benefits. Investing in ELSS (equity-linked saving scheme) allows you to achieve the goal of financial independence in a tax-efficient manner. While these funds come with a 3-year lock-in period, they qualify for tax deduction under Section 80(C) of the Income Tax Act. You can leverage this deduction to lower your annual tax liabilities. Moreover, you pay taxes on mutual funds only if you’ve earned dividends or booked capital gains.
Enjoy liquidity and financial flexibility
Liquidity and flexibility is yet another compelling advantage of mutual fund investments. MFs provide daily liquidity. In other words, you can redeem your investment at any time and gain access to your funds to meet urgent cash flow requirements. Apart from liquidity, mutual fund SIPs offer ample investment flexibility. Depending on your income and other factors, you can choose your investment amount as well as investment frequency. In fact, you can start with a small amount and gradually increase your contributions with a step-up SIP. Therefore, achieving financial independence through mutual fund investments ensures an easy and flexible way to secure your future.
Capitalise on a high risk tolerance when you’re young
Achieving financial independence through mutual funds means building a sizable corpus to live your life without feeling the pangs of financial restraints. Remember that risk and return are always linked such that riskier investments (equities) generally offer higher return potentials. Starting early investments in MFs, helps you explore your risk appetite. As investors age, their risk capacity declines and they prefer more conservative MFs like debt funds. When you are a young investor, you can afford to take on more risks since you have a longer time horizon to recover from any potential losses along the way. Investing in equity funds early, helps you capitalise on a long time horizon and build a sizable corpus overtime.