Want to invest in Equity Mutual Funds; here’s what you should know

Equity funds are those who gives you advantage of entering into stock markets, and your risk related to these funds are managed by expertise.

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Many of us are often scared to invest our savings in equity-related market, mainly because we are not aware of its working.

Confusion in such investment schemes is very natural as we fear that equity-related market is very volatile, uncertain and also guarantees no return.

Therefore, we often end up choosing investment modes like fixed deposits, savings account or any other small savings scheme.

Here, you will come to know in detail about the advantages of investing in equity especially in mutual funds.

Equity Mutual Funds

Mutual funds are at booming stage in India currently and it comes in many category and one such is equity mutual funds.

As the name suggests, equity mutual funds are made in stock market, under which you buy shares of a companies in large quantities with prime object to earn higher returns.

There are several types of equity mutual funds like diversified equity funds (having more than one particular stocks), sector and thematic funds (like FMCG, auto, etc), large cap (well established firms), mid-cap and small-cap (smaller companies with turnover between Rs 20 crore – Rs 500 crore) and index funds (like all 30 Sensex companies).

According to Motilal Oswal, there are five advantages of investing in Equity MF.

1. Professional Management

Even though you pay for everything, your portfolio is managed by expert professionals whose main motive to manage your investment and safeguard your returns.

Asset Management Companies (AMCs) appoint experienced and expert professionals to invest your money in equity. Fund managers spend quality time learning about the past and researching about the future performance of companies they invest your money in.

2. Portfolio Diversification

Investments of as small as Rs 500 in this mutual fund scheme gives you the privilege to make a diversified portfolio. Portfolio diversification helps to reduce risk which means you are less likely to lose money on your investments. Compared to direct investments in stocks, equity mutual fund schemes are affordable yet diversified models of investing.

3. Liquidity

These are mostly liquid based schemes, as they offer you an opportunity to redeem your investment at any time or at a net asset value (NAV) higher than NAV at the time of purchase.

However, this is not applicable in equity linked savings schemes where lock in period of 3 years has to maintained by an investor.

You can even invest more in equity mutual fund schemes during the market fall to buy units at lower NAV. Such liberty of investing and redeeming gives you better control over your investments.

4. Systematic/ Regular investments

This scheme does not require a heavy amount of investment, it gives you opportunity to start your account at a small sum which can be paid at regular intervals via Systematic Investment Plan (SIP).

The small sums that you invest regularly are invested to buy stocks. This also develops a regular habit of investing which is useful in long term wealth creation.

5. Tax benefits

Usually it is advised to hold an equity mutual fund scheme for a period of one year, as the capital gain on your investment gets exempted from tax liabilities. Look at the brighter side , you create enough wealth in equity MF for one year and do not have to pay for taxes.

Apart from this, the Indian government also gives tax rebate for equity linked savings schemes (ELSS) under section 80C of Income Tax Act 1961. One can invest into ELSS and deduct upto Rs 1,50,000 from your taxable income to effectively reduce your tax liability.

So why not start creating SIP in equity funds.

An SIP is usually a monthly investment that happens automatically on a pre-decided date. There are many firms which offer you SIP on equity funds, you just have to open an account with them and they will take care of your investment.

By giving a mandate to the fund company for deducting your investment amount from your bank account, SIP gets average out from your cost of investment.

When SIP gets average out from your bank account, then takes place the allotment of shares in the equity funds.

Generally, when the markets are high you get allotted with fewer units, and when they are low you receive more units in your portfolio with the same amount.

One big advantage of carrying out a SIP in equity funds, makes investing become a habit. SIPs are automated investments that ensure you save the designated amount every month.

This way you can invest before you spend, as the SIP date is in the beginning of the month for most of investors.