7 Reasons to invest in equity mutual funds

You can invest in equities either by directly investing in stocks, or through investing in equity mutual funds. To directly invest in stocks, it’s important to have a good understanding of how the stock market works. However, for investing in equity mutual funds, you need not study the markets in depth because these funds are managed by professional fund managers. Therefore, if you are a new investor or don’t have much time to track the markets, it may be prudent to invest in an equity mutual fund than investing in stocks directly. Herein, we discuss a few other key reasons to consider investing in equity mutual funds.

1. Expert fund management

All mutual funds are managed by fund managers who are appointed by the asset management company (AMC). A mutual fund manager is responsible for making investment decisions and has an Asset Management Company (AMC) that works professionally on tasks such as analysis, research, and trading. An AMC has a more comprehensive approach to investing than any individual investor. An AMC has an overall investment approach that defines criteria for portfolio construction, monitoring and assessing risks. Furthermore, fund managers visit different companies, attend conferences, communicate with the companies in which they invest, and adopt other crucial approaches, which is extremely difficult for individual retail investors. Apart from this, fund managers constantly monitor geopolitical, economic, and sectoral developments to identify opportunities for capital appreciation.

2. Risk management

Mutual fund managers adopt a fixed set of measures either prescribed by the AMC or the regulator to generate risk-adjusted returns on mutual fund schemes. Such schemes are monitored and documented periodically.

For instance, concentration risk is controlled by restricting sector- or stock-level exposure to a predetermined limit. Moreover, other risk factors such as volatility and stock liquidity are considered by AMCs. By contrast, it is operationally difficult for any one individual to follow a multiple risk mitigation approach when investing in stocks.

3. Diversification

The risks associated with equity funds are managed by investing in different sectors and stocks, that is, by diversifying your investments across different market instruments. For this reason, your investment in an equity fund is not concentrated in any specific sector or stock.

Diversification helps cushion against sudden shocks in the market. In other words, if any one stock fails to perform well in an equity scheme, other stock investments may make up for this underperformance. By contrast, if you invest in individual stocks to gain equity exposure, you may find it tough to diversify across sectors and stocks. This is because the capital cost of such diversification would be huge, and one would require specialized skills to monitor the portfolio periodically.

4. Small investible amount

Unlike the above case, when investing in an equity mutual fund, you can start to build a well-diversified investment portfolio by investing amounts as low as Rs. 100 through the Systematic Investment Plan (SIP) mode.

5. Convenience

Purchasing units of an equity mutual fund scheme is more convenient and easier than purchasing multiple individual stocks. This is because in the latter case, you will have to form an investment portfolio and monitor it regularly. However, in the case of an equity mutual fund, you will just need to invest your money either once through lumpsum investment route or at predetermined intervals through the SIP route in one mutual fund scheme. After investing, you would do well to monitor the fund’s performance once every six months to a year.

6. Well-regulated

All equity mutual fund schemes are regulated and monitored by the Securities and Exchange Board of India (SEBI), which mandates transparency in disclosures. All mutual fund schemes are required to disclose their month-end investment portfolios on their product literature, in addition to the net asset value (NAV), periodic expense ratio, and past yearly yields. You can find all of this important information on the official websites of mutual fund houses.

In addition, several independent financial platforms track these details of mutual fund schemes, list their past performance, and publish portfolio analysis reports to allow you to make informed decisions. Thus, transparency is an important benefit of investing in equity mutual funds.

7. Wealth creation

Equity mutual funds offer significant scope for capital appreciation, and they may have the potential to beat inflation over the long term. For these reasons, equity mutual funds may be a suitable financial option for fulfilling long-term financial goals such as corpus accumulation for retirement life, children’s higher education and wedding, or purchasing a house.

Conclusion

In sum, it is operationally difficult for individuals to invest across multiple sectors and stocks with the aim of building a well-diversified investment portfolio. However, you can build a diversified portfolio by investing in an equity fund scheme through a single transaction in the lump sum mode. In case you hold a minimal investible surplus every month, you can periodically invest a predetermined small amount in equity mutual funds through the SIP mode or you can download the sip app. Besides, equity mutual funds offer other benefits such as expert fund management, risk mitigation, convenience, and high information transparency.

Source: Axismf Research

Note: Views and opinions contained herein are for information purposes only and should not be construed as investment advice/ recommendation to any party or solicitation to buy, sale or hold any security or to adopt any investment strategy. It does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The recipient should exercise due caution and/ or seek professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein.

Statutory Disclaimer: Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the AMC). Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.