Some of you may only know of one way to invest in the equity market and that is through buying and selling stocks of publicly listed companies. However, there is also another way to seek exposure to equity markets and that is through equity mutual funds. In fact, a lot of stock market investors start their investment journey with equity mutual funds because it gives them a fair idea about how the markets function. When it comes to the direct stock market, one needs to be very sure about their investment decisions as a small error can lead to great losses. On the other hand, equity mutual funds are run by Asset Management Companies (AMC) where there are professional portfolio managers actively managing risk and handling people’s money. So, doesn’t it make sense to invest in equity funds, especially if you are new to the world of investing?
Here are 5 primary reasons to invest in equity mutual funds
Managed by expert fund managers
Unlike direct stock market investment where the investor himself is responsible for all the investment decisions that he or she makes, equity mutual funds offer professional fund management. These funds have a designated team of analysts, researchers, and fund managers who are actively scouting credible stocks to suit the scheme’s investment objective and generate risk-adjusted returns throughout market cycles. Investors do not have to personally choose stocks, they just have to invest regularly. Their hard-earned money is actively managed by a team of professional fund managers.
Mitigation of risk
All portfolio managers have to abide by the norms and regulations defined by SEBI. Hence, a fund manager cannot take risks higher than what the rules define. For example, a small cap fund invests a minimum of 65% of its portfolio in small cap stocks. Here, the fund manager must ensure that the portfolio maintains a minimum of 65% exposure to small cap markets throughout. The AMC ensures that the fund manager takes various risks like concentration, stock liquidity, market volatility, etc. which a normal individual might find difficult.
Equity funds offer diversification
When you invest in a single equity mutual fund, you get exposure to different stocks belonging to various sectors, industries, and market capitalizations. If you have to individually invest in all these stocks it might not be possible as sometimes, a single company stock costs thousands of rupees. The fund manager builds a diversified investment portfolio keeping in mind that he does not overexpose to any sector, cap or industry. Diversification may not only allow the portfolio to outperform its benchmark in the long run but may also save the equity fund for unpredictable market upheavals.
Start small with SIP
As mentioned earlier, to buy direct stocks and build a diversified portfolio, one may need to shell out a large amount of capital. However, through the option of Systematic Investment Plan (SIP) investors can invest small sums at regular intervals. One does not need to have a large investment sum to begin their investment journey with equity funds. In fact, some equity funds offer investors the option of starting a monthly SIP with an amount as low as Rs 500.
Some equity funds offer tax benefits
Investors may not be aware, but they can actually bring down their overall tax liability by investing in equity mutual funds. Equity Linked Savings Scheme (ELSS) is an open ended tax saving scheme that comes with a predetermined lock-in period and a tax benefit. Under Section 80C of the Indian Income Tax Act 1961, investors can invest up to Rs 1.5 Lacs in ELSS and seek tax exemption over the invested sum.