Equity Mutual Funds are a pooled investment that draws money from various investors to garner a huge corpus to invest in various stocks. Equity funds are thereby also known as stock funds which are witnessing rising popularity as no investment avenue can generate as good returns as equities. Despite some risks involved, the advantages of equity funds are the reasons that investors look forward to investing in them.
Benefits of Equity Funds
Investors have found a profitable investment option in equity funds because of its multiple benefits. The multiple benefits of mutual funds make it a profitable investment avenue that investors can put their money to are listed below-
An investor can invest in a few stocks at a time but with equity funds, s/he can invest in multiple stocks. Equity funds offer diversification in many ways. One- they invest in several stocks, two- they invest in various sectors, and three- they also invest in other asset classes. As an investor, you can own a share in equities of companies across various capitalizations and pan sectors. You can benefit from the profits of all, as well as, reduce the risk with even distribution of funds. Also, the presence of fixed income securities and other money market instruments further diversifies and balances the investment portfolio.
- Risk Mitigation
Owing to diversification where the fund corpus is evenly spread over various stocks, it also spreads the associated profits and risks. When one stock underperforms, the other may pick up. Similarly, if one sector is falling, the other may balance the portfolio, thereby reducing the overall loss incurred. They reduce the stock and sector-specific risk to a great extent because the investor is not dependent on one single stock or industry.
- Professional Management
Mutual funds are professionally managed by analysts who have the experience and expertise in investment management. They research and analyze the various stocks and market trends and aim to outperform the benchmark indices. They are tasked with generating superior returns than the market indices for their investors. Thus, many investors who lack the skill, willpower, or the time to track the market or predict the stock performance should invest in mutual funds. The fund managers will do their best to obtain optimum returns.
- Wealth Creation
Equity funds tend to generate the highest returns among all kinds of investments. They have the capacity to offer inflation-beating returns that can help the investors to create a good corpus in the future. Investors having long-term goals of capital generation should invest in equity funds. They do have an element of risk but they can bounce back if you hold them for a long duration.
Equity funds are cost-efficient because you can be a shareholder in various companies through small investments without a high capital requirement. Purchasing stocks in every company, otherwise, could have been a costly affair. Therefore, it offers economies of scale by making you a participant investor in multiple companies than what you could have done individually. Also, as the fund size grows, the amount can be spread over more units of the fund, thereby making the per-unit cost cheaper.
Moreover, you can invest in equity funds both in lump sum as well as periodic payments of Systematic Investment Plans (SIPs). With SIPs, you can make monthly payments of an amount as low as Rs. 500, which is light on your pocket.
Equity funds invest in stocks that are traded on the market. The sale and purchase of stocks make the funds highly liquid. Similarly, investors can easily redeem the equity fund units whenever they wish to. Once they redeem it, the money equal to the value of the units at the time of sale will be deposited in your account within a few days. They are open-ended funds and have no lock-in period except for Equity Linked Savings Scheme (ELSS). Hence, equity mutual funds are flexible and easy to liquidate, unlike term deposits.
- Dividend Income
Equity funds offer investors to choose between growth and dividend plans. When you opt for a dividend plan, you get dividend income either monthly, quarterly, bi-annually, or annually. A dividend is a profit on the shareholding of the investor and in mutual funds, it is the cumulative profit of all stocks. The profits earned from an equity fund are divided among all investors as per their unit holding after the deduction of applicable charges. For those who do not opt for a dividend plan, their profits are reinvested, while those who seek dividend income are paid.
Not all schemes come with dividend options, and also the amounts and frequency of payouts are not guaranteed. As mutual funds are subject to market performance, the dividend is subject to distributable surplus. Also, investors must note that the NAV (Net Asset Value) of the fund falls after dividend distribution, impacting your capital gains in the long run.
- Power of Compounding
This is for those investors who opt for a growth plan rather than a dividend plan. The interest or the profits earned is not paid out but rather re-invested in the fund to purchase more units and allocate them to the investors. This strategy helps to buy more units with the interest income and enhance the invested capital. You earn interest on the previous interest and therefore, you can accumulate huge capital gains in the long term.
- Regulated by SEBI
Investors are doubtful to put their money in risky ventures that are not transparent or are unregulated. The Securities and Exchange Board of India (SEBI) lays down the norms for the functioning of mutual funds and directs all the Asset Management Companies (AMCs) to follow them. There is also a self-regulatory body Association of Mutual Funds in India (AMFI) which also functions under the supervision of SEBI. SEBI demands all the fund houses to release statements of all their mutual fund schemes. These disclosures must contain the NAVs, expense ratios, the fund managers’ names/qualifications/experience, and the asset allocation information for investors to view and analyze.
Equity Funds are taxed at 10% for long-term capital gains and 15% for short-term gains. However, they are tax-exempt up to Rs. 1 Lakh for long-term gains, and 10% tax is applicable only if the capital gains exceed the given amount. Also, when you opt for ELSS, you have the tax benefits under Section 80C of the Income Tax Act and you are tax-exempt up to Rs. 1.5 Lakh. ELSS is the only tax-saving scheme with only 3 years of lock-in period in comparison to 5 years of other tax-saver schemes. Also, when you do not choose the dividend plan, you save on Dividend Distribution Tax (DDT).
Wrapping it up:
One of the major benefits of equity funds goes without saying that a large variety of equity funds are available to suit the large scale of investors. Different investors have different goals and risk tolerance as well as the time they want to stay invested. You can invest in a lump sum or via SIP and you can also save tax through ELSS. You can focus on sectoral equity funds or thematic funds if you think certain industries or sectors would rise. If you are moderately risk-tolerant and want stable returns, then invest in large-cap equity mutual funds. If you can take the high risk to tap the growth opportunity of small companies to accumulate wealth in a long time, then you should invest in small-cap equity funds. Similarly, you can explore the large variety of equity mutual funds to enjoy the benefits of a professionally managed, diverse, and cost-effective portfolio.