Before we talk about the advantages of equity Mutual Funds (MF), let us talk a little about why to invest in the first place. Investments are important as they help you to work towards your financial security, financial independence and also attain your goals. Equity MFs can work as a very important asset class while building up your investment portfolio. They not only offer higher returns, but diversify your portfolio at the same time.
Equity MFs are primarily a type of fund that invest the pooled money from investors into stocks of various companies. It is the gains or losses arising from the rise or fall in prices of these stocks which decide the performance of this fund. Investing in equity market requires adequate knowledge, risk-taking ability and patience, if you have to make an effective investment portfolio. Let us discuss the benefits of investing in equity mutual funds.
One of the biggest benefits of investing in such kind of mutual fund is that they are professionally managed. The fund managers managing these funds have ample experience in studying these stocks, they have access to the management of the companies wherein they can ask about their queries and are able to study ins and outs of the company’s business. Such kind of information is generally not available to a retail investor. As a result, investors get to use the knowledge and capabilities of fund managers who make it their business to find out the intricacies of the working of the stocks that they invest in. However, this is to keep in mind that investments in mutual funds are subject to market risks; one should always read offer documents carefully before investing.
Equity investment tends to generate great returns in the long run. So, when a person invests in an equity mutual fund, he not only gets capital appreciation (if he ties himself to the fund for long term) but also gets the benefit of economies of scale as a large pool of investments is parked in various stocks, which means you get to participate in investing in so many more companies than you could have done individually.
One of the chief benefits of investing in the stock market is investors can buy and sell stocks as per the need. Investment in equity mutual fund provides the facility of easy liquidity, for instance, in open-ended equity mutual fund schemes one can redeem the investments at any time, whenever there is a need of the money. It takes around a weeks’ time for the whole process to be completed, in case of the matured SIP; an investor can get the cash in three to four working days.
The Securities and Exchange Board of India (SEBI) and Association of Mutual Funds in India (AMFI) regulate all mutual funds. Both these statutory government bodies ensure safe and healthy investment practices. They mandate a certain level of transparency in the disclosures. All funds disclose their month-end portfolios on their website besides daily NAVs (Net Asset Value) and periodic expense ratios as mandated by SEBI. There are many independent research houses which track this information and provide the performance along with portfolio analysis of mutual funds to help investors and distributors so they can make informed investment decisions.
There are so many types of equity mutual fund schemes available to match different kind of investment goals. There is no upper limit to your investment in mutual funds and you can start from as low as Rs 500. Based on your risk-taking capacity and the urgency of your goals there are so many different types of schemes available to invest in for example: if you are a high-risk taking investor and are looking for higher returns on your investments you have options like investing in mid-cap or low-cap funds which basically invest in small growing companies or you have an option to invest in sector funds which invest in companies from one sector itself like Real Estate, FMCG or Pharma.
The returns in equity mutual funds are taxed at 10 per cent and become tax-free when investments in these funds go beyond a holding period of 12 months. In case, if redeemed within a short period, the actual returns become negative. It is always suggested to invest for a long time to earn high compounded returns and also to get all the money tax-free once redeemed.
Investing in the equity mutual fund gets spread into considerable number of stocks minimizing the risk of losses in future, in short it helps diversifying your portfolio. So, if some stock underperforms at the exchange, the outperforming ones can make up for the damages hence reducing the overall loss occurred and the market risk in the overall portfolio. These mutual funds help you to have a small amount of so many stocks from various companies in your portfolio even if you are starting a monthly SIP of Rs 500; thus, balancing your investments overall.
With increased awareness of the benefits of the equity mutual funds, this sector has seen huge growth over the last couple of years. The advent of technology has played a vital role in escalating the demand for equity mutual funds as well. Mobile technology and the internet have made the task easy and hassle-free as it just takes10-minute to get started in investing in mutual funds. Mutual funds are easy to invest in and are offered by brokerage firms, online platforms, banks and now mobile apps. The cost of investing in mutual funds is also very low as compared to investing directly in equities due to economies of scale in transactions and lower management costs. Equity Mutual Funds are best suited for an investor with a moderate to high risk appetite.
The author is the Director of Master Capital Services