Traditionally, most investors save for future goals like children's education, marriage and their own retirement by putting money in fixed deposits, insurance policies, post office monthly investments, PPF      etc.These investments will give you returns of 6-8.7% over the long term. Some of these also offer tax benefits on maturity .

On the other hand, if you consider inflation at 7% or more each year, you can see that returns from traditional schemes are not adequate to keep pace with rising prices.So it becomes difficult to set financial goals around traditional investment products.Hence, an investor needs to have a certain percentage of funds allocated to equity .

We don't recommend investing directly into equities since all investors are not experts in doing the same. An ideal route for investing in equities and other asset classes is through mutual funds (MFs). Here, we will deal with two particular factors that give MFs an edge over other asset classes in setting and achieving life's financial goals.

Magic with power of 7 years

Ram invests in recurring deposits (RDs) and Shyam invests in balanced MF schemes for the same tenure and monthly investments. Their returns and wealth growth are shown in the table RDs vs Balanced MFs. Here, you can see that the compounding effect works wonders after completing more then seven years of investment in MFs for Shyam.His wealth grew by 1.5X compared to investments through RDs. The exposure in a balanced fund plays the role of a kicker for the portfolio, giving better returns over the long term. His returns also beat the rate of inflation, giving real returns on his investments.

Regret of 5 years

Now let's consider that Ram and Shyam both start monthly investments at the age of 30 and 25 years, respectively. The table below shows that Shyam's investments in MFs more than tripled than Ram's since he started early . Ram delayed by five years to start investing and, as a result, his corpus is much lower compared to Shyam's (see table Advantage of saving early).

Hence, we recommend investing in MFs at an early age so you won't regret any delay after looking at the corpus created for particular goals. Also, start with small regular investments in MF schemes, diversify the portfolio with four-five schemes after understanding your risk appetite. Let your investment portfolio taste the magic power of seven over the tenure of your goals.