Investment benefits of investing in an equity fund
Equity funds are popular mutual fund investment vehicles that pool money from various retail investors and invest primarily in equities or stocks of distinct companies. Such funds offer investors the opportunity to take part in the stock market’s potential growth without directly purchasing individual stocks. These funds are available in different types like large-cap, mid-cap, small-cap, large and mid-cap, multi-cap, sector-specific, etc. Discussed here are the top investment benefits of investing in equity funds. Read on to understand.
Long-term wealth creation
Equity funds are especially suitable for retail investors seeking to accumulate wealth over a long time period to meet goals such as retirement planning, child’s higher education or marriage. By remaining invested in equities and equity-linked instruments for the long run, retail investors can avail the benefit of capital appreciation and compounding effect.
Potential for higher returns
Equity mutual funds are known to offer higher returns than other asset instruments such as bonds or fixed deposits over the long run. While previous performance does not assure the same future results, equities historically have shown the potential to outperform inflation and fixed-income instruments.
This is a strategy to reduce risk in a portfolio. Equity funds provide diversification by investing the investible in distinct stocks throughout various market capitalisations and sectors. This lowers the effect of market volatility associated with individual sectors and stocks, thus potentially increasing risk-adjusted returns.
Equity funds are managed by experienced fund managers who analyse the market, research companies, and select suitable stocks for the fund’s portfolio. This expertise helps investors make informed investment decisions, especially when they lack the time or knowledge to do so themselves.
Equity funds held for over a year qualify for LTCG (long-term capital gains) tax benefits. Note that in a financial year, LTCG of up to Rs 1 lakh are tax-exempt while gains of over Rs 1 lakh attracts a tax of 10 per cent. This suitable tax treatment can increase the after-tax returns for investors.
Systematic investment plans (SIPs)
Equity mutual funds provide the flexibility of investing through systematic investment plans (SIPs). SIPs allow investors to invest a fixed amount at regular intervals, such as monthly or quarterly. This approach helps in rupee cost averaging, where investors buy more units when the markets are down and fewer units when the markets are up, potentially reducing the overall cost of acquisition.
In conclusion, retail investors should consider equity mutual funds as a suitable investment avenue for meeting their long-term financial goals, particularly for accumulating a retirement corpus. While fixed-income instruments may offer stability and fixed returns, they often fall short of beating inflation over the long run. By putting a small portion of their investible in equity mutual funds, even low-risk investors can gain the benefit of diversification and earn higher returns. However, it is crucial to note that equity investing carries inherent market risks and retail investors must assess their risk appetite level and investment time frame before making an investment decision. Getting in touch with a financial planner or advisor can help as they can provide customised guidance in choosing the correct equity mutual fund scheme depending on individual goals and risk tolerance level.