Equity mutual funds play an important role in building your investment portfolio. Also known as stock funds, equity funds are mutual fund schemes that invest in the stocks of different companies. These funds can be managed actively or passively and are primarily categorised based on market capitalisation – large cap, mid cap, and small cap.
Equity funds not only offer higher returns compared to debt instruments but also help to diversify your investment portfolio. Keep reading to explore what other exclusive benefits equity mutual funds offer to investors.
- Better inflation-adjusted returns
Equity fund investments can provide better inflation-adjusted returns compared to traditional investment options. This is because the returns are linked to market performance, providing the potential for decent growth of capital over the long term. Moreover, downturns in the market can give investors an opportunity to buy low and then sell high when the market recovers.
- Portfolio diversification
When investors invest in an equity mutual fund, they can spread their risk across multiple stocks, thus diversifying their portfolio. This diversification can help to protect the investment from the volatility of any one particular stock.
- Professional management
Equity funds are effectively managed by experts known as fund managers. This can be a big benefit if you don’t have the time or expertise to manage your investments. The fund manager will research stocks and make investment decisions on your behalf by studying the market and analysing the performance of companies. They have extensive experience in evaluating which stocks are performing well and which ones are not, so they can invest in the best-performing stocks. This results in optimal returns for the investor.
- Convenience of SIP investment
Equity mutual funds do not require you to invest lumpsum amounts. Investors can make investments of as low as Rs 500 a month through a Systematic Investment Plan (SIP). This amount is deducted from your account regularly as per your chosen frequency. SIP investments also help hedge the volatility in the equity market by allowing investors to invest small amounts of money regularly and take advantage of rupee cost averaging.
- Tax benefits of equity mutual funds
Equity Linked Savings Scheme (ELSS) funds are a type of mutual fund that come with tax benefits. Investments in ELSS funds are currently eligible for deductions of up to Rs 1.5 lakh a year under section 80C of the Income Tax Act, 1961. Thus, if you invest in ELSS, you get the dual benefits of capital appreciation and tax savings. Note that ELSS funds have a mandatory lock-in period of three years, which is the shortest among many other tax-saving investment options.
So, who should invest in equity funds?
It is important to understand that equity funds tend to be volatile and risky as they invest in stocks. Thus, these funds are ideal for investors with a high-risk tolerance and who are willing to invest over the long term – at least seven to eight years.
Equity funds have the potential to generate attractive returns over the long term. But ultimately, the decision about which equity funds to invest in depends on various factors including your risk appetite, age, investment amount, and time horizon. So, make sure to see if the investment objective of the equity mutual fund aligns with your financial profile before you make an investment.