Many investors swear by mutual funds, especially equity mutual funds. Equity mutual funds allow you to invest in the stock market, either in a broad manner or in a specific sector or theme, and benefit from market-linked returns. But why do they make for good investments? Here are some of the practical reasons.
- Diversification
When you invest in an equity mutual fund, you are investing in stocks of several companies as opposed to just one company. This means that even if one or more companies don’t perform well, your fund’s returns don’t have to take a hit because the performance of other stocks can make up for it. This way, equity mutual funds allow you to hedge the risk of stock market volatility by diversifying your investment.
- Professional management
Investing calls for several strategic decisions that play a significant role in determining the kind of returns you will earn. These decisions include what to buy, how to allocate funds, when to buy, when to sell, etc. When you invest in equity mutual funds, there is a professional fund manager who makes all these calls. Hence, you don’t have to worry about tracking the market or know everything about stocks to benefit from equity investments.
- Systematic investment plans
Equity mutual funds offer two ways in which you can invest in stocks – lump sum or a Systematic Investment Plan (SIP). The first option involves making a one-time payment to invest in an equity fund of your choice. This is a good option when you have a chunk of money free for investing and when the market prices are low. The second option involves investing a small amount of money regularly over a period of time in a fund of your choice. An SIP is a popular option among investors because it makes equities accessible at as low as Rs 500, sometimes Rs 100, a month.
- Inflation-beating returns
When you invest in equity mutual funds, you have the possibility of earning good returns. Equity investments often give inflation-beating returns, which helps store and grow the value of your money. That’s because inflation tends to erode the value of your money over time as price levels for goods and services increase. So, if the inflation rate is 7% and your equity fund return is 10%, then you are earning inflation-beating returns.
- Tax benefits
When you sell your equity mutual fund units that you held for more than 12 months, the gains on these units are termed as Long-term Capital Gains (LTCGs) that are taxed at 10%. However, LTCGs on equity mutual funds are exempt up to Rs 1 lakh a year. Additionally, you can invest in a type of equity fund called the Equity-Linked Savings Scheme (ELSS) that allows you to claim a tax deduction of up to Rs 1.5 lakh per financial year under section 80C of the Income Tax Act, 1961.
Final words
There are several benefits of investing in equity mutual funds and there are various types of equity funds to choose from. You can invest in large-cap, mid-cap, or small-cap equity funds. You also have ELSS funds, international funds, and more to choose from. The best part is that you can easily invest in mutual funds online and also use a mutual fund calculator to assess how much wealth you can generate over time through your investments.
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