Reason why equity mutual funds are more popular amongst the investors


Every investment scheme is made so that more and more people are able to benefit from it. However, every scheme has a different risk profile different investment objective and caters to the needs of different types of investors. The best way to earn long term capital appreciation especially if you are a young investor with a very high risk appetite is by investing in a market linked scheme like equity mutual funds.

Equity mutual funds are considered to be the riskiest of all mutual fund investments because they have maximum exposure to stocks and other equity related instruments. However, a lot of investors consider equity mutual funds especially to targe their life’s long term financial goals like building a retirement corpus or securing their daughter’s financial future or for her high studies or such goals that need a large commendable corpus.

Let us find out why more and more people are considering equity mutual funds?

An equity mutual fund is an open ended scheme that invests the majority of its investible corpus in equity and equity related instruments of publicly listed companies. As per SEBI guidelines, an equity fund must invest a minimum of 65 percent to 80 percent of its total assets in stocks and other equity related instruments.

Equity funds have outperformed every other conventional investment avenue in the past. Unlike Public Provident Fund and Bank Fixed Deposits (FDs), equity mutual funds do not guarantee returns. Still, people prefer equity funds over conventional investment avenues. PPF and bank FDs have lost their charm as current interest rates in India are an all time low. People have realized that 4 percent fixed returns aren’t going to help them with any of their financial goals. For example, if you invest Rs 1000 for 1 year, assuming 4% interest you will only earn Rs 40. Whereas if you invest the same sum in an equity fund there are chances that you might earn anywhere between Rs 120 to Rs 150. People have started to notice the vast difference in terms of earning potential and hence are investing more and more in equity funds.

Also, over the long term equity related investments tend to reduce overall risk. Equity mutual funds may seem volatile in the short run and may even produce negative returns. But they have always outperformed and generated decent returns for long term investors.

Those who invest in equity mutual funds for a longer duration generally opt for the Systematic Investment Plan. SIP is a simple and easy way to invest small sums in equity funds and to gradually increase your corpus over the years. Investors can even benefit from the power of compounding and rupee cost averaging. If you aren’t sure about the exact sum you need to invest regularly to achieve your ultimate financial goal, you can take the help of the online SIP calculator a free tool that any layman can use.

What some individuals do not know is that they can even save tax every year by investing in Equity Linked Savings Scheme (ELSS). ELSS is the only equity mutual fund scheme, in fact, the only type of mutual fund scheme under Section 80C of the Indian Income Tax Act, 1961 comes with a tax benefit. Investors can invest up to Rs. 1.5 Lacs every year in ELSS and bring down their tax liability. Also, ELSS has the shortest lock-in period which spans only 3 years as opposed to other tax saving instruments where your money is locked in anywhere between 5 to 15 years.