Why You Should Invest in Equity Mutual Funds

If you are looking for the best investment option to earn valuable returns to accomplish your long-term goals, there are several options. You can go for fixed deposits, public provident funds, or save your money in a savings account and earn interest over it. However, if you’re looking to have a much higher rate of return than the above options, then one of the most popular forms of investment is the mutual funds.

An Overview of Equity Funds

Even within mutual funds, there are various funds that you can choose. You can invest in debt funds, equity funds or a hybrid of both. As the name suggests, equity fund investment is nothing but stock market investment via mutual funds. But why invest in equity , when you can go for the much stable debt fund? Out of all mutual funds, equity mutual funds have the most potential to earn excellent returns. Of course, since this is the stock market, there is also a certain level of risk associated with equity mutual funds. Therefore, those investors who have a higher risk appetite are most suitable for equity mutual funds.

Diversification

This is probably the number one reason why investors prefer investing in equity-based mutual funds. Now, what is diversification, you ask? Well, diversification is the term used to describe a fund that is broken down and invested in different or ‘diverse’ portfolios. This means that your investment doesn’t go entirely into one company or one type of companies in the stock market, because if that company starts losing money, your entire investment is at risk. The phrase ‘don’t put all your eggs in the same basket’ can be used to describe best what diversification means.

Better capital appreciation

If you want to invest in mutual funds, but are torn between debt funds and equity funds, then the best thing you can do is analyse what type of growth you’re looking for. Between debt funds and equity funds, the latter has a much better capital appreciation rate and therefore a higher rate of return.

Equity mutual funds and tax-saving

Investing in equity mutual funds can also help you save taxes. One tax-saving mutual funds are Equity Linked Savings Schemes or ELSS. Investments made in ELSS are tax-deductible up to Rs. 1.5 Lakh per year under Section 80C of the Income Tax Act. Also, the long term capital gains tax for ELSS funds is tax-free upto Rs. 1 lakh.

Also, as compared to other investment options benefitting from section 80C like Fixed Deposits and Public Provident Fund, ELSS has the shortest lock-in period of three years, making it one of the most popular forms of mutual fund investment.

Long term financial growth

Equity mutual funds are one of the best investment options if you have a long-term goal in mind. Since the stock market is volatile, the fluctuations can only be countered by staying invested for the long term. This gives the investor the benefit of rupee cost averaging, especially if one is investing via SIPs.

Thus, staying invested in equity mutual funds can help achieve your long-term goals in two ways. One, it will give you much higher returns as compared to debt funds. And second, because you are invested for a longer duration, the risk factor becomes very low.

Bottomline on Investment in Equity Mutual Funds

It comes as no surprise that equity-based mutual funds have quickly become one of the most popular forms of investment for investors. This is especially true for new investors who want to look beyond the traditional investment options like fixed deposits and savings accounts for more efficient investment tools.