The best part about investing in market linked schemes like mutual funds is that they offer active risk management. Investors do not need to have a deeper understanding of the markets or spend hours reading the financial section watching financial news channels to invest in mutual funds. These are a pool of funds that are managed by a team of professional fund managers who collect money from investors sharing a common investment objective and invest them across various asset classes and money market instruments.
The craze of mutual funds in India has picked up the recent past and equity schemes are one of the heavily invested mutual funds. What is it that makes equity funds are a sheer favorite of both seasoned as well as novice retail investors?
Let us find out more about equity mutual funds and why you may consider diversifying your investment portfolio with them –
What are equity mutual funds?
Equity mutual funds are opened schemes that invest the majority of their investible corpus in equity and equity related instruments of publicly listed companies. As per capital market regulator SEBI guidelines, equity mutual funds must invest a minimum of 80% of their total assets in stocks. The remaining of the portfolio can seek exposure to fixed income securities and money market instruments.
Reasons to invest in equity mutual funds
They invest in a diversified portfolio of securities
By investing in a single equity mutual fund investors get exposure to a large number of stocks that can add growth and value to the portfolio. The fund manager decides how many stocks to invest in and how much percentage of the AUM should be allocated to which stock. Investors need not worry about forming a portfolio or getting into the complexities of stock selection. All they have to do is invest according to their risk appetite in an equity fund that is well diversified with stocks spread across sectors and industries.
Chance of earning better capital appreciation
There is a misconception among investors who believe that all investments in equity lead to negative returns. That is not true at all as equity mutual funds have the potential to generate decent returns over the long run. Yes, short term investing in equity mutual funds is not advised as your portfolio can experience a negative shift. However, in the long run, investors might be able to generate risk adjusted inflation beating returns.
SIP and Lump-sum option
Mutual fund investors can either choose to invest in equity schemes through a one-time lump-sum investment or by opting for the Systematic Investment Plan (SIP). SIP is a simple and effective way to save and invest a fixed sum periodically in equity funds. Investors can invest a sum as low as Rs 500 every month, thus making an affordable way to invest in equity schemes. Investors can even use SIP calculator to determine the future potential returns that their investments might be able to fetch over a certain duration.
Active risk management
Equity mutual funds are managed by a team of fund managers who are responsible for ensuring that fund is able to outperform its benchmark and generate returns for its investors. The portfolio is actively managed and investors do not have to worry as their money is managed by an experienced team of portfolio managers.
Tax saving benefits
ELSS (Equity Linked Savings Scheme) is an equity mutual fund scheme that comes with a tax benefit and the shortest lock-in period among other 80C tax saving instruments. Investors can invest up to Rs. 1.5 Lac every fiscal year in ELSS and seek tax exemption on the amount invested.