Equity Mutual Funds invest in stocks as per the fund’s investment mandate. The advantage of investing in Equity Funds is that you hold a diversified portfolio.

There are more than 3,000 listed companies on BSE. It is practically difficult for novice investors to track so many companies and decide which stocks would do well in the future. Thus, Equity Funds are ideal for retail investors as they are managed by experienced fund managers. Fund managers are supported by analysts who keep a hawk’s eye on sectors, stocks, economy and, comb through company balance sheets to study important trends shaping the market.

Equity Mutual Funds invest in shares of publicly listed companies across market capitalization based on the fund’s investment objective. Equities reward investors through dividends, bonus shares and capital gains through rise in stock price, which is linked to company’s earnings growth. As opposed to investing in bonds, which rewards investors largely through coupon interest and carries relatively less risk as compared to equities, equities provide a high-risk high-return potential as stock prices swing up and down due to a variety of reasons linked to the company, industry and economy in general.

That said, equities may offer the potential to beat inflation in the long run. India’s retail inflation as measured by Consumer Price Index (CPI) has hovered around 6.04% average over the last ten years. (Source: Trading Economics.) Over the last ten years, Nifty 100 Total Return Index (TRI) has grown by 13.23% CAGR as of January 23, 2023. During the same period, S&P BSE 500 Index has grown at a CAGR of 13.18%. (Source: Bloomberg)

In the above example you can see that equities have the potential to beat inflation over the long run. For a long term goal like retirement or children’s higher education/wedding, equities can have the potential to compound your wealth. Since equities can be volatile in the short run, one should preferably invest in Equity Mutual Funds only if the investment horizon is at least five years or more.

The risk is mitigated in equity funds over a long period of time. Equity Funds are inherently volatile as the underlying holdings are stocks that tend to react to news and other events daily. You would be familiar with the correction we witnessed in 2008-09 (global financial crisis) and 2020 (pandemic-induced slowdown) and how markets have recovered from the crisis. Thus, patience is key to creating wealth in Equity Funds.

You can invest in Equity Funds through lumpsum or Systematic Investment Plan (SIP). You can also use features like Systematic Transfer Plan (STP) and Switch.

Depending on your cash flows, you can choose to invest through one of the modes. Since markets tend to be volatile, retail investors should ideally stagger their investments in equity, which helps in averaging out investments. Whether you invest through SIP or lumpsum, it is advisable to have a long-term horizon while investing in equity mutual funds.

Investments redeemed on or after 23rd July 2024.

• Holding Period (To qualify for LTCG): 12 months

• Short Term Capital Gains Tax: 20%

• Long Term Capital Gains Tax: 12.5% (with an exemption up to INR 1.25 lakhs)

Plus surcharge and cess as may be applicable on the above rates.

Benefits

• Liquidity: Except for ELSS, solution oriented funds like Retirement and Children’s Funds which come with a lock-in period, investors get the credit of money on the number of units redeemed at the applicable Net Asset Value (NAV) from Domestic Equity Mutual Funds in 3 business days.

• Start Small: You don’t need much money to invest in Equity Mutual Funds. You can start with an investment of Rs 1,000 to Rs, 5,000 depending on the minimum investment required in a scheme.

• Flexibility: You can choose to invest monthly or quarterly through SIPs as per your cash flows. You can redeem your money at any time (except for ELSS and solution oriented funds which have a lock-in).

• Transparency: The portfolios of the schemes are published monthly on the AMC website. You get to see where your money has been invested.

• Investment Value: You can see the latest value of your investments as against your original investment on AMC websites.

• Growth: Equity Funds can help you build long-term wealth as they may beat inflation.

Investments made in Equity Linked Savings Scheme (ELSS) can be only redeemed after three years as they qualify for tax-saving under Section 80C of the Income Tax Act.

The decision to choose the type of Equity Mutual Fund would depend on your goal, risk appetite, and time horizon. Investors who have long term goals like buying a house, retirement, children’s higher education, etc. and are comfortable with the volatility associated with equities can consider Equity Funds.

To conclude, a financial advisor can help you recommend funds based on your life goals, asset allocation and risk appetite.