Why is it a Good Idea to Invest in Equity Funds?

Equity funds are a highly suitable form of investment for people looking to earn good returns to achieve their long-term goals. Investment in these funds offers returns that are generally higher than those generated by traditional investments like provident fund. Since investments in equity markets involve risk, equity funds are recommended for achieving long-term returns and not meeting short-term goals. Let us look at the features of equity funds in India that make them a popular investment option.

Equity Funds in India

This category of mutual funds primarily invests in equity markets with the stocks selected by a professional team managing the fund. The selection is based on the fund’s category and done after   thorough research and analysis of the fundamentals of a company and the technical indicators   depicting their price movements. The fund managers continuously monitor these stocks and review their investments from time to time to ensure that the mutual funds’ performance remains in-line with the set goals. The aim of equity funds in India is to deliver maximum returns while keeping the risk in control.

Equity funds can be categorised as:

  • Large-cap Funds – These funds have to invest at least 80% of their corpus in the top 100 companies in India by capitalization.
  • Mid-Cap Funds – They have to invest a minimum of 65% of their total assets in India’s mid-cap companies.
  • Small-Cap Funds – These funds invest in the stock of small companies.

Equity funds may also invest in a specific sector or an index depending on the pre-set objectives.

Why Go for Equity Funds?

Equity markets attract the attention of many investors but most of them lack the time and the ability to track the segment and invest in equities. Equity funds in India allow investors to participate in the equity markets even with small amounts. Let us look at some benefits of investing in equity funds:

  • Professionally Managed – Since mutual funds are managed by professionals who take investment decisions after thorough research and analysis, investors save a lot of time and effort. These experts continuously monitor economic, political, and other factors that can affect the performance of stocks in which they have invested and take appropriate action.
  • Risk Management – Since mutual fund investments are based on a specific set of rules defined by the regulator and the asset management company, they are planned and managed well. Mutual funds are governed by rules that mitigate the concentration risk by setting a limit for investment in a certain segment or sector.
  • Diversification – Investment in equity funds allows investors to have a diversified exposure to different industries and segments which would not have been possible through individual investments. Mutual fund investments can be made by even a small amount of money, as low as RS 500 through a systematic investment plan or SIP.
  • No Requirement of Opening a Demat Account Mutual fund investments do not require you to open a Demat account or a broker account. You will simply need to be KYC or Know Your Customer compliant for investing in mutual funds.

Tax Benefits – Investing in equity mutual funds comes with tax benefits when you opt for ELSS schemes. Investments in Equity Linked Saving Schemes or ELSS are tax-deductible up to RS 1.5 lakh per year under Sec 80C of the Income Tax Act. The long-term capital gains tax for ELSS funds is also tax-free up to RS 1 lakh. These schemes come with a lock-in period of three years.

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