Why you Should Invest in Equity Mutual Funds

Last Updated: 28 Oct 2024

If you are looking for the best investment option to earn valuable returns for accomplishing your long-term goals, you can go for fixed deposits, public provident funds, or interest accrued by putting your money in a savings account. However, if you’re looking for a higher rate of return than the above options, then mutual funds can be a wise choice.

An overview of equity funds

Even under mutual funds, there are various options that you can choose. You can invest in debt funds, equity funds or a hybrid of both. Equity fund investments consist of stock market investment via mutual funds. Out of all mutual funds, equity funds have the most potential to earn excellent returns. Of course there is also a certain level of risk associated with them. Therefore, the investors who have a higher risk appetite are most suitable for equity mutual funds.

Top reasons why you should start investing in equity mutual funds

Diversification

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 a certain type of company in the stock market, because if that company undergoes losses, your entire investment will be at risk. The phrase ‘don’t put all your eggs in the same basket’ can be used to describe the meaning of diversification.

Better capital appreciation

If you want to invest in mutual funds but are torn between debt funds and equity funds, then a good next step is to 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. A tax-saving mutual fund is Equity Linked Savings Schemes (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, fluctuations can only be countered by maintaining long-term investments. This gives the investor the benefit of rupee cost averaging, especially if they are investing via Systematic Investment Plans (SIPs).
Thus, staying invested in equity mutual funds can help achieve your long-term goals in two ways. Firstly, it will give you much higher returns as compared to debt funds. Secondly, because you are invested for a longer duration, the risk factor is considerably lowered.

Bottomline on investment in equity mutual funds

Unsurprisingly, 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 traditional investment options like fixed deposits and savings accounts for more efficient investment tools, often accessing and managing their investments by downloading a trading app.