Investing is a crucial part of personal finance management. It gives an opportunity to grow your wealth, achieve financial independence and beat inflation. As an investor, you have several options available, such as debt funds, hybrid funds, or gold funds. Each asset class comes with a different risk-return trade-off. However, one asset class that should not be missed or overlooked is equity funds.
Equity mutual funds invest in stocks of publicly listed companies across market capitalizations and form an essential component of a diversified and profitable portfolio. Although equity investments carry high risk, the rewards are equally worth it.
Keep reading to learn why equity funds are essential for investors and how they can be a valuable addition to your mutual fund portfolio.
1. Diversification
Equity mutual funds offer a diversified portfolio of stocks. This means your investments are spread across multiple companies, reducing their risk if one or a few companies underperform. This diversification helps investors to minimise the impact of market volatility, which is especially beneficial for those looking to save for long-term goals.
Moreover, different types of equity funds offer options for diversification based on capitalization. You can choose from large cap, mid cap, small cap, multi cap, and flexi cap funds for your investments. This customised approach allows investors to balance their portfolios, mitigate risks, and enhance their returns.
2. Professional management
Equity mutual funds are managed by professional fund managers who have years of experience and resources to manage investments. These fund managers carefully analyse the market trends, company financials, and other factors before making investment decisions on behalf of investors.
3. Low investment minimums
Unlike direct stock investments, equity investment via systematic investment plan or SIP allow investors to invest small amounts regularly. This means even those with limited capital can become investors in the stock market and reap the benefits of equity funds.
Moreover, SIPs also offer the flexibility to increase investment amounts gradually via Step up SIP. This facility helps investors to start investment in mutual funds with low amounts and increase the contributions as per their goals and financial capacities.
4. Potential for higher returns over long term
These funds invest in stocks of companies with strong growth potential, which can produce higher returns than other investment options. The key is to invest in right equity funds and stay invested for the long term.
Short term fluctuations are inevitable, but they tend to stabilise over time. So it is wise for investors not to panic and make impulsive decisions based on short-term reactions. Instead, leverage these market fluctuations to find undervalued stocks and remain invested for higher returns in the long term.
5. Tax savings
If you hold equity funds for more than a year, any gains you make will be considered as long term capital gains (LTCG). And long term capital gain on equity mutual funds of up to Rs 1 lakh are tax-exempt.
Also, investments in Equity Linked Savings Scheme (ELSS) funds are eligible for tax deductions under section 80C of the Income Tax Act, 1961. ELSS is a diversified equity fund that predominantly invests its corpus in equity, and its lock-in period is three years. Besides capital appreciation, these equity funds help in tax planning and saving.
To wrap up
From diversification and higher returns to professional management and tax benefits, equity funds play an important part in any portfolio. They also offer liquidity, flexibility, and convenience. Moreover, with the availability of online platforms and mutual funds investment apps, it is possible to invest in equity funds with just a few clicks. But at the same time, it is equally important to evaluate the past performance, fees, portfolio holdings, and other critical factors of the fund before investing.
Remember, investing responsibly is key to long-term success and financial security.