Equities are known to have the highest growth potential. Sensex, the stock market index that tracks the best stocks in India has grown over 75% in the last five years as of mid-October. This means if you had invested in Sensex’s composition five years before, you could have gained a profit at similar levels.
But investing in equities directly can be a risky affair, especially if you are a beginner. This is because it demands a higher level of market knowledge, and you may need to constantly monitor your portfolio, too. This may not be possible for every investor, and one possible option is equity mutual funds. Let us learn more about equity mutual funds and find out ten reasons to invest in them.
Equity funds provide portfolio diversification
Directly investing in equities comes with a higher risk. This is because you may end up losing money if the stock market is to go through a tough phase during your term of investment. But when you invest in equities through mutual funds, the portfolio is often balanced with other securities providing a balance by default.
Equity funds come with lesser risk
Equity funds come with a lesser risk of investment. This is because of the above-said diversification. Diversification can ensure that there are elements to protect your investments as well, while the equity portion helps with capital appreciation.
Equity investments require higher expertise than regular investments. But in the case of equity mutual funds, a professional fund manager manages the same.
The fund manager takes care of picking the stops to create a professional portfolio, investing in those stocks on behalf of several investors, and monitoring the portfolio.
Equity funds help wealth creation
As said above, equity mutual funds are known to have the best potential for growth in the longer term. Hence, investing in equity funds is a beneficial way of wealth creation. At the same time, the high return potential of equities comes with a higher risk as well. It is always a good idea to be mindful of that fact.
Equity funds are cost-efficient
Manually investing in stocks is not only a chore, but it also is a costly affair. This is because you will end up paying a fee for each of the purchases. Instead of that, when you invest in equities through mutual funds, you pay for each unit trade, and each unit of mutual funds consists of several stocks.
Equity funds have high liquidity
Stocks are one of the investment options that have high liquidity. Equity mutual funds, since they invest in equities, have similar attributes.
Equity funds give dividend income
Equity funds invest in stocks, and some of them give out dividends. If you choose a dividend plan, you are ensuring regular income through your investment.
Equity funds are helped by compounding.
Compounding is a phenomenon in investing where the returns from your investments are reinvested into the fund so that the compounded corpus will start earning interest. Compounding can have a crucial part in the appreciation of your capital with equity investments in the long term.
Equity funds are highly regulated
Another factor that makes equity funds safe is the fact that they are highly regulated. They come under the purview of the Securities and Exchanges Commission of India (SEBI).
Equity investments are tax efficient
Equity investments are a way to save in taxes. If you invest in equities for a longer period (over one year), your income from the same falls in long-term capital gains. Long-term capital gains up to Rs.1 lakh are tax-exempt. The same is taxed at a flat % over the limit of Rs 1 lakh.
The above points explain why investing in equity funds can be a beneficial option. But be sure to choose an equity fund according to your goals to get the best out of your investment.