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December 1, 2021
Finance

Equity funds, a better option for first-time investors

First time investors are often confused when it comes to starting their investment journey. Most of them are convinced that since they are already investing a portion of their monthly income in PPF, that should suffice for their future financial needs. However, investing in schemes like EPF or PPF only covers the debt element of one’s investment portfolio. This is why experts emphasize financial planning and ask individuals to diversify their investment portfolios based on their financial goals, risk appetite, and investment horizon. Conventional schemes are offering very low interest rates these days and hence one cannot depend only on such investments for achieving life’s long term financial goals.

First time investors who are young, have a long term investment horizon, and are willing to take risks can consider investing a portion of their regular income in market linked schemes like equity mutual funds.

What are equity funds?

Equity funds are those mutual fund schemes that invest the majority of their investible corpus in equity and equity related instruments. Of its total assets, an equity fund may invest a minimum of 80% in stocks of publicly listed companies. The remaining assets are allocated as per the scheme’s nature and investment objective. Since they heavily invest in stocks and equity, these funds are considered to be highly volatile in the short run. This is exactly why we have mentioned earlier that equity funds are best suited for those with a high risk appetite and the willingness to remain invested for the long haul.

Why should first-time investors consider equity mutual funds?

Historically, equity mutual funds have outperformed all other traditional investment avenues in the long run which is why they are ideal for investors. However, here are a few things that make equity mutual funds a good investment option for first-time investors:

They invest in various securities

Equity mutual funds invest in a basket of securities. This way, they offer diversification. One single mutual fund unit is a combination of various stocks. So if few stocks in the portfolio underperform, other stocks can even out the losses, and this way the equity fund is still able to deliver. Thus, by investing in various single equity funds, investors can get exposure to various stocks without having to individually invest in them.

Active risk management

Mutual funds like equity funds are managed by a team of expert fund managers who ensure that they buy and sell securities such that the investment objective of the scheme is accomplished. Thus, first time investors who do not have a deeper understanding of how equity markets function can consider equity funds as they are managed by fund managers with rich industry experience.

Tax benefit

Investors can consider Equity Linked Savings Scheme (ELSS), an equity fund that comes with a tax benefit. Under Section 80C of the Indian Income Tax Act, 1961 and a tax paying citizen can invest up to Rs. 1.5 lakhs in this tax saver fund and bring down their tax liability. ELSS comes with a three year lock-in period which is the shortest among other tax paying instruments. By investing in this tax saving scheme, investors can earn long term capital appreciation whilst enjoying tax benefits.

Invest small sums

One does not need to have a large investment corpus to commence their equity mutual fund journey. They can start investing with an amount as low as Rs. 500 via Systematic Investment Plan (SIP). Investors who aren’t sure how much they need to invest can use an online SIP calculator, a free online tool that is easy to use.

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