Equity Mutual Funds: 5 Solid Reasons to Consider While Investing

Investing is the act of allocating a portion of your income to an investment scheme that invests in the market. Through this action, you might end up accumulating wealth over time.

One of the prominent examples of investment schemes that allocate funds to the market is mutual funds. These funds purchase different financial securities, such as gold, money market instruments, bonds, and stocks, after pooling money from other investors in a fund. Once revenue is generated through a mutual fund scheme, it is proportionately distributed amongst the investors.

However, it is imperative to note that selecting a mutual fund scheme is not enough. It is also essential to sign up for the right variant of a mutual fund.

Equity funds are one of the different types of mutual funds available for investing in. As the name suggests, these funds are known to invest primarily in equities. When you sign up for equity funds, the fund exposes your investments to the equity market.

If the market is bullish, you made a prudent choice by signing up for equity funds. On the other hand, if the market is going through a bear phase, you may have to wait for some time for the market to recover. Therefore, it is important to note that the income generated through equity mutual funds is linked to market conditions.

How do Equity funds work?
As mentioned before, this type of mutual fund is known to invest a major portion of your monthly income in equity shares of companies in specific proportions.

Asset allocation in these funds depends mainly on factors such as the type of equity fund and how well it aligns with the investment objective. Then, depending on the market conditions, the asset is allocated to stocks of either mid-, small-, or large-cap businesses.

Furthermore, the fund manager spreads the investment across different asset classes and sectors. This action helps in bringing down the element of risk. At the same time, allocating a portion of the fund to money market instruments and other financial securities takes care of sudden redemption requests.

Also, just like mutual funds, equity funds come in different variants. The said types of equity funds are:

* Small or micro-cap funds:
A small- or micro-cap fund directs its investments towards companies ranked above 250 in terms of market capitalisation. Considered riskier than a mid or large-cap equity fund, these funds may come with the potential of offering income of a comparatively higher value. These funds allocate funds to organisations yet to be discovered by the market but may come with a great potential to be a front-runner in future.

* Mid-cap funds:
Mid-cap funds focus on firms that (in terms of market capitalisation) could be found under the ranks falling between 101 and 250. While probably not as risky as small-cap funds, these funds come with a higher degree of risk than large-cap funds.

* Large-cap funds:
This variant invests in well-established businesses. They focus on companies that fall between 1 and 100 in total market capitalisation.

Are there any advantages that are associated with signing up for equity funds?
Here are five reasons why some financial experts consider an equity investment to be a prudent choice:

1. They might help with long-term wealth creation:
As the name equity funds suggests, these mutual funds direct their investment towards equities. Furthermore, these funds might also come with the capacity to offer inflation-adjusted income. This feature might help investors create a good corpus in the future. While it is true that these funds are known to come with an element of risk, they do have the capacity to bounce back if you were to hold on to them for a long duration. So, investing in equity mutual funds might be an ideal investment solution if you have a long-term financial goal.

2. Investments in these funds can be easily diversified:
These mutual funds are known to offer diversification in numerous ways. Firstly, these funds aim to invest in the several, i.e., in more than one stock. Also, they are focussed on investing in businesses belonging to not one but several sectors. Another way these funds offer diversification is by investing in other asset classes. By signing up for equity mutual funds, your investments are allocated to equity shares of businesses found across various market capitalisations and sectors.

Diversification comes with twin benefits. Firstly, you could benefit from the seamless performance of all the companies. Simultaneously, it helps in reducing the risks. Furthermore, the presence of money market instruments and other financial securities further diversifies and balances the investment portfolio.

3. These funds come with the benefits of compounding:
Equity funds might be ideal for investors seeking a growth plan, not a dividend one. The interest or the revenue generated through these schemes is not paid out. Instead, they are re-invested in the fund to purchase more units. Following this strategy might help buy more units, possibly adding more to the invested capital. Through the benefit of compounding, you might earn interest on the prior interest, and you may accumulate considerable capital gains in the long term.

4. Equity funds might offer liquidity:
Liquidity could be defined as the ease with which investors could redeem their investments. While some investment options in the market come with a lock-in period, equity funds are not one of them. These funds are known to invest in stocks that are traded on the market. The sale and purchase of stocks make equity funds highly liquid. Likewise, investors may redeem the equity fund units whenever they want to, and that too quickly.

After redeeming it, the money will be deposited in your account within a few days. Most of the variants of these funds have no lock-in period. The only exception here is equity-linked savings schemes (ELSS). Therefore, equity mutual funds are known for being flexible and easy to liquidate.

5. It is possible to enjoy professional management:
Just like it is in the case of mutual funds, equity funds are also professionally managed. The responsibility of managing these funds falls in the hands of analysts who are experts and experienced in investment. They are responsible for carrying out research and analysis of various stocks and market trends. Also, equity funds aim to outperform benchmark indices. These professional fund managers are responsible for the upkeep and management of the fund.

Apart from the five above, there are several other reasons why you should consider opting for equity mutual funds. However, it is essential to remember that instead of signing up for equity funds for their different advantages, you should sign up for them only after determining your investment objective and risk appetite.

Disclaimer -
*ELSS Investments are subject to a 3-year lock-in period and are eligible for tax benefit under section 80C of the Income Tax Act, 1961.

#As per the present tax laws, eligible investors (individual/HUF) are entitled to deduction from their gross income of the amount invested in Equity Linked Saving Scheme (ELSS) up to Rs.1.5 lakhs (along with other prescribed investments) under section 80C of the Income Tax Act, 1961. Tax savings of Rs. 46,800 mentioned above is calculated for the highest income tax slab.

Finance Act, 2020 has announced a new tax regime giving taxpayers an option to pay taxes at a concessional rate (new slab rates) from FY 2020-21 onwards. Any individual/ HUF opting to be taxed under the new tax regime from FY 2020-21 onwards will have to give up certain exemptions and deductions. Since, individuals/ HUF opting for the new tax regime are not eligible for Chapter VI-A deductions, the investment in ELSS Funds cannot be claimed as deduction from the total income.

Investors are advised to consult his/her own Tax Consultant with respect to the specific amount of tax and other implications arising out of his/her participation in ELSS'

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