People often underestimate the power of mutual fund investing. Mutual funds have the potential to offer risk adjusted returns. These are market linked schemes that have outperformed all other types of conventional schemes like PPF and bank FDs. Mutual funds do not offer guaranteed returns like other fixed income offering instruments, but historically they have delivered an average return of up to 15 percent. That is almost twice as compared to what fixed income instruments are currently offering. Investors with a long term investment horizon and a very high risk appetite often consider investing in equity mutual funds. Equity funds are best suited for young professionals as they have more years in hand to rebalance their portfolio and can take more risk than those who are in their mid-forties or nearing the age of retirement.
Let us focus on the main benefits of investing in equity mutual funds.
Equity schemes offer diversification
Equity mutual funds invest in a wide range of stocks belonging to companies of various sectors and industries. A well-diversified portfolio can not only mitigate the overall investment risk but also adjust the returns in case some of the stocks fail to deliver. Investing in equity mutual funds is better than investing in direct equities where the concentration risk is very high. By investing in equity funds, investors get exposure to a portfolio of stocks that have growth potential. If they had to purchase these stocks personally, some of them cost thousands of rupees. However, through mutual funds, investors can own a small portion of each of these stocks rather than betting all their money on one single company stock.
Equity Funds can help save tax
For those who do not know, it is possible to bring down your tax liability by investing in an equity scheme like ELSS. Equity linked Savings Scheme (ELSS) is a tax saving scheme that comes with a three year lock-in. An investor can invest up to Rs 150000 per fiscal year and save tax. While they save tax with ELSS, their money is invested across market capitalization which allows the fund to create wealth over its three year lock-in period. Sooner or later, your salary will fall on either of the tax slabs and hence investors can consider investing in ELSS to save tax.
Equity Funds can help target life’s financial goals
If you have financial goals that require a wealth creation plan, you may be able to achieve these goals with equity mutual funds. As individuals, we may have certain financial goals like building a commendable retirement corpus or buying a new house or securing our child’s financial future, or saving money for their education. All these goals are long term and require a large corpus. Investors may be able to target such long term goals by systematically investing in equity funds through a Systematic Investment Plan.
Equity funds offer SIP
As mentioned earlier, it is possible to invest in equity schemes through the Systematic Investment Plan (SIP). In SIP, all the investor has to do is decide a sum he or she is comfortable investing periodically and then continue investing this sum in equity funds till their investment objective is accomplished. SIPs are highly flexible which allows the investors to increase their monthly SIP sum at their convenience. Investors can even stop their SIP investments at any given time and do not have to pay any penalty for doing so. Also, since there is an upper limit on SIP investments investors can invest as much as they want depending on their investment objective and financial goals.