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December 1, 2021
Finance

Benefits of investing in Equity Mutual funds

Individuals who want to fulfill their life’s long term financial goals like building a hefty retirement corpus, buying a new house, securing their child’s financial future, etc. must take up financial planning at an early stage in their life. When you start with financial planning, it allows you to determine your most important goals, and based on the priority you can strategize your investments accordingly. Financial advisors recommend young investors diversify their investment portfolios across asset classes. This way they can minimize the overall investment risk and at the same time give their portfolio a chance to generate income from various asset classes and money market instruments.

Young investors who have high risk tolerance and also have a long investment horizon, such individuals can consider investing in market linked schemes like equity mutual funds.

What are equity mutual funds?

Mutual funds can be largely categorized as equity and debt funds. While debt funds try to generate stable returns by investing in fixed income securities and debt related instruments, equity funds are those mutual funds that invest a majority of their investible corpus in equity and equity related instruments of publicly listed companies.

Of its total investible corpus, an equity mutual fund must invest a minimum of 80% in stocks of companies. Whether an equity fund will invest in a large cap, mid cap or a small cap fund will depend on the investment objective and nature of the scheme.

What are some of the benefits of investing in equity mutual funds?

You can save tax

Equity Linked Savings Scheme is an equity mutual fund that aims at generating capital appreciation over the long term while offering tax benefits. ELSS is a tax saving scheme that comes with a predetermined lock-in period of three years. It falls under Section 80C of the Indian Income Tax Act, 1961 where an individual can invest up to Rs. 1.5 lakhs per fiscal year and seek tax exemption on the same.

You can target long term financial goals

In order for your equity mutual funds to perform, investors must have a long term investment horizon spanning up to 5 years or more. That’s because equity markets are volatile in the short run and one’s portfolio can even witness losses. However, in the long run, equity markets have always corrected and delivered exceptionally. Historically, equity funds have generated better returns in the long term and have always outperformed traditional investment avenues like PPF and bank FDs.

Diversification

The best part of investing in equity funds is that they avoid concentration risk which is there in direct equities. Equity funds invest in a basket of securities, thus allowing the portfolio to deliver even if some of its underlying assets underperform from time to time. Diversification also mitigates overall investment risk and even if some stocks fail to deliver, chances are that other stocks in the basket may perform and balance the portfolio’s overall returns.

You can invest small sums via SIP

Systematic Investment Plan is a simple and effective way to build a commendable corpus. If you wish to create wealth gradually over the long term with equity funds, you can consider starting a monthly SIP in equity funds. Investors can also use an online SIP calculator, a free tool that lets them calculate their future returns. It’s a simple tool that anyone can use and get a fair idea of how much their total returns from SIP in equity funds will be. Long term investing in equity funds via SIP can offer several benefits like the power of compounding and rupee cost averaging.

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