Benefits of Equity Funds

Benefits of Equity Funds

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Six reasons why equity mutual funds are a good investment choice

TLDR Points

  • An equity mutual fund holds at least 60% of its investments in stocks.
  • It is professionally managed, which saves the investor the time and effort to pick the best securities.
  • Investing in equity funds like ELSS (Equity-Linked Savings Schemes) is tax efficient.
  • The investor can own a diversified portfolio for as little as Rs. 500 with an SIP.

Introduction

There was a time when only those with a penchant for understanding geopolitics, the financial market, and macro and microeconomics, would be able to successfully invest in the stock market successfully. Thanks to equity mutual funds, this has changed. Today, any financially conscientious investor who has some capacity to bear risks can start their investment journey in equity mutual funds with as little as Rs. 500.

Read the rest of this article to understand just how investment in equity funds benefits the investors.

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Benefits of equity mutual funds

Portfolio diversification

Let’s say you invest all your savings in the stocks of company X, and the share prices go down. Even if you try to sell your shares immediately, you may receive fewer profits than your original investment. However, when you invest in an equity fund, you are putting your money in a diverse portfolio of stocks. So, even if one or two of them take a big hit, your overall returns do not get significantly affected. There may always be a few companies who do better than expected which nullify losses from other companies.

If you invest in individual stocks, you may be limited by your knowledge of the various sectors. This can lead to you investing in only a few promising companies instead of many. An equity fund investment increases your options.

Professional fund management

With an equity mutual fund, you can reap the benefits of stable or high returns while your fund manager monitors your portfolio. Their extensive knowledge and understanding of the mutual fund world help them make the best investments on your behalf.

Transparency

When it’s your hard-earned money, you want to be able to trust the people who are managing your money for you. To ensure this, SEBI closely regulates all mutual funds in India. It also monitors mutual fund advisories and distributors. All mutual fund houses or banks have to share their portfolios on their official website at the end of the month so that investors know exactly where their money is going. It also mandates the daily disclosure of the Net Asset Value (NAV) of the mutual fund and the exchange ratio. All this information empowers you to make informed decisions like whether to buy, redeem or hold a portfolio.

Provision to start low

You don’t need to have a staggering amount to be able to invest in an equity mutual fund. Instead of paying a lump sum amount, you can choose to invest through a Systematic Investment Plan (SIP). With an SIP, you can invest a comfortable amount at periodic intervals, into the equity mutual fund. Some banks or AMCs allow you to begin systematic payments as low as Rs.500 per month.

Convenience

When you invest in equity mutual funds, a fund manager may oversee your portfolio. They will keep track of your stocks, and make suitable changes to get you the best equity fund returns. For added convenience, many banks give you the option to start investing through their mobile apps.

All you need to start investing in a mutual fund is your KYC. This is a separate requirement by SEBI before you open a mutual fund account.  You can do this online in a few minutes.

Tax efficiency

You have to pay something known as ‘capital gains tax’ on the returns you earn from your equity funds. Any investments up to 12 months (of a financial year) attract Short-Term Capital Gains (STCG) tax. Any holding beyond a year attracts Long-Term Capital Gains (LTCG).

If you participate directly in buying and selling shares, you may end up paying taxes on gains with each sell transaction. On the other hand, with an equity fund, you will have to pay the capital gains tax only at the end of your investment period. You do not have to pay tax after every modification made to the mutual fund portfolio. This makes the process of paying taxes on your equity mutual fund investment less tedious.   

Moreover, equity fund schemes like ELSS (Equity-Linked Savings Schemes) qualify for tax deduction under Section 80C. This fund is the only equity-oriented plan which compares with other asset classes under 80C. So in any tax season, if you are looking at reducing your income tax liability, an ELSS is a great way to begin.

Conclusion

Investing in an equity fund allows you to build a robust investment portfolio. Now that you know its benefits and how to invest in equity funds, why not start the process of investing in one?

Download digibank to explore the different mutual funds on offer.

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