5 Benefits of Investing in Equity Mutual Fund Schemes

Mutual fund investments in India offer two types of schemes to invest in – they are passive mutual funds known as ETF or exchange traded funds and actively managed mutual funds. ETF are low-cost mutual funds which tries to mirror the return of a market benchmark that it follows. On the other hand, active mutual funds endeavour to generate excess returns by beating the benchmark it follows. Also, to invest in ETF, you must have a demat account as it trades just like shares. However, for investing in active funds, having a demat account is not a necessity.

While both type of mutual funds invest in markets, equities, or bonds or in both, it is the choice of the investors where they want to invest, depending upon their convenience and expertise.

Among the various active and passive mutual fund scheme categories, one category that stand out as very popular is equity mutual funds and today, we will discuss the benefits of investing in it.

·    Best performing asset class in the long term: Historical data shows that, equity is the best performing asset class in the long run. In the last 20 years, the CNX NIFTY has given over 13.5% annualized returns. Rs 1.00 Lakh invested 20 years back, would now be Rs 12.70 Lakhs, which is much higher than the returns on fixed deposit, gold, and public provident fund (Source: Advisorkhoj website, data as on 26^th Oct 2023)

·      Risk Diversification: When we invest in equity mutual fund schemes or ETF schemes which track equity benchmarks, we invest in a diversified portfolio of stocks across different sectors and companies. Therefore, mutual fund investors can achieve risk diversification with a much smaller investment.

·      Professional Management: Stock selection is a complex task, therefore by investing through mutual funds, you entrust the task to Asset Management Companies who have team of research analysts and fund managers who have the necessary experience and expertise to analyse stocks and other instruments and invest as per the scheme mandate.

·      Systematic Investing: SIP or systematic investing in mutual fund schemes is the most popular way of saving your surplus amounts. Through systematic investing, you can plan and invest for your long-term goals, like retirement and child education. However, you cannot invest systematically in ETF mutual funds as it trades like stocks. Investing through mutual Fund systematic investment plans offers a convenient mechanism of saving small amounts every month or week or quarter (based on your convenience) to be used for your long-term needs. For example - If you can save even Rs 2,000 every month through SIP in a mutual fund scheme, over a 20 year period, assuming you get a 15% return on your investment, you can accumulate a corpus of around Rs 30 lakhs.

·     Tax Advantage: Equity mutual fund, as an asset class, enjoys significant tax advantages compared to other asset classes. Long term (investments held for more than 12 months) capital gains from equity mutual funds are tax free up to Rs 1.00 Lakh in a financial year. Gains in excess of Rs 1.00 Lakh in a year, is taxed at 10% only.