Things to Know Before You Put Money on Equity Funds

Mutual funds are a great investment option for a lot of people. However, with the variety of mutual fund investment schemes available out there, choosing the best one for you can be quite challenging. In this article, we are going to talk about everything that you need to know about equity funds to make your investment options a smooth one. 

What are equity funds?

An Equity fund is a type of mutual fund that tries to generate high returns by investing in the shares of different companies. It is one of the riskiest investment plans as it takes into consideration the performance of the company. Equity funds, though risky, try to generate better returns than term deposits or debt-based returns. 

How does equity fund work?

Equity mutual funds work by investing in the equity shares of different companies in suitable proportions. 

Features of an equity fund

Some of the important features of an equity fund are mentioned below.

  1. Lower expense ratio- The regular buying and selling of shares in equity fund can lead to an increase in the expense ratio of the scheme. The Securities and Exchange Board of India (SEBI) has created an upper limit for the expense ratio of equity funds at 2.5%. A lower expense ratio will ensure high returns for investors. 
  1. Tax redemption under Section 80C- The Equity Linked Savings Scheme (ELSS) offers tax exemption under Section 80C of the Income Tax Act with exposure to equity. The lock-in period of 3 years that it possesses will ensure good returns. It also makes investment convenient since you can invest in installments in an ELSS. It thus offers mutual funds tax savingCost-efficiency and diversification-When you invest in equity funds, you are exposed to several stocks at a nominal amount. However, it possesses the risk of diversification. 

Benefits of investing in equity mutual funds

Some of the benefits of investing in equity mutual funds are mentioned below.

  1. It offers diversification.
  2. You can invest in equity funds in installments.
  3. It is cost-efficient.
  4. It offers flexibility and liquidity.
  5. Expert investment management.
  6. Convenient.

You can earn great returns by investing in equity funds once you have gained experience in the market. 

Taxation rules for equity funds

  • Capital Gains Tax-The short term capital gains or STCG that you can earn if you hold the units of a scheme for one year is 15%.
  • Dividend distribution tax- The dividend distribution tax which is deducted at the source is 10%.

Difference between SIP and lumpsum

 The major difference between lumpsum and SIP is that in lumpsum investment, you invest the amount altogether. On the other hand in SIP investment, you invest in installments. SIP investments are safer and convenient compared to lumpsum since you can stop and skip your investments at any time without being fined. 

Choosing the right scheme is one of the primary means of ensuring healthy returns. We hope the above-mentioned points will be helpful for you. 

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