7 Advantages & Disadvantages of Equity Mutual Funds
Should I Invest in Equity Mutual Funds?
Equity mutual funds primarily invest in stocks to get the benefit from rising stock prices in the capital market. No other investment vehicle offers scope of such high returns as Equity Mutual Fund. In this article, we are going to see 7 advantages and disadvantages of equity mutual funds. How can an equity fund be an ideal investment vehicle for the investors?
SHOULD I INVEST IN EQUITY MUTUAL FUNDS?
YES, you should invest in Equity Mutual Funds for all your long term financial goal. It may include Retirement, Child’s education, Child’s Marriage or any other goal which is atleast 5 years away. Following are advantages and disadvantages of investing in Equity Mutual Funds.
ADVANTAGES OF EQUITY MUTUAL FUNDS
- Diversification in the portfolio of fund helps in mitigating the risk. This attribute makes the equity funds most suitable for small individual investors.
- Risk mitigation ensures that many equity mutual funds are well diversified across stocks and sectors. So that they are not over-exposed to any particular stock or sector.
- Equity Mutual Funds give you an automatic diversification in many different stocks. For Example, HDFC Equity fund has 50 stocks in its portfolio.
- Equity Funds are reasonably liquid with money back in your bank account after 3 working days of redemption. They offer you an opportunity to redeem your investments at any time. (Except for Equity Linked Saving Schemes-‘ELSS’ which has a lock in period of 3 years).
- You can redeem all your investments in the time of need or when a Net Asset Value (NAV) higher than NAV at the time of purchase.
- Few funds charge an exit load, of as high as 2% if you redeem investment before a stipulated period (mostly 1year). For Example – HDFC Equity charge an exit load of 1% if investment is redeemed in first 365 days.
3. Professional Fund Management
- An Asset Management Company (AMC) works in a professional set-up with individual functions of research, analysis and trading being carried out by experts. AMC will have a more comprehensive industry perspective and outlook than an individual.
- Money invested in equity markets is managed professionally by fund managers.
- Mutual fund experts visit conferences and interact with companies in which they invest. Besides, a mutual fund also continuously monitors economic, geo-political, sector, asset class and stock level developments at a micro level to gauge possible opportunities going forward.
- Thus, Most of the fund managers regularly beat their fund’s benchmarks.
4. Small Ticket size (you can start small)
- If you try to build a diversified portfolio with all types of stocks by buying them directly, you would need relatively large amount of funds.
- In equity fund, you can start off by owning a well-diversified portfolio for as less as Rs.500 (through a monthly Systematic Investment Plan). You can start your investment with as low as Rs. 5000 as lumpsum and Rs. 500 as SIP and can own big basket of stocks.
5. Systematic / Regular Investments
- Equity mutual fund schemes offer you a facility to invest small sums at regular intervals through systematic investment plans (SIP). SIP makes it simpler for the beginners to invest in equity mutual fund schemes.
- These small sums that you invest regularly are invested to buy stocks. This also develops a regular habit of investing which is useful in long term wealth creation
6. Tax Benefits
- If the holding period of the investments in equity mutual funds is more than 1 year, the capital gain is exempted from tax liabilities.
- Government of India also provides tax rebate for equity linked saving schemes (ELSS) u/s 80C of Income Tax Act 1961.
- You can invest into ELSS and deduct upto Rs. 1,50,000/- from your taxable income to effectively reduce your tax liability.
7. Exceptional past returns
- Equity funds are known to provide higher returns as compared to other funds, such as Debt funds. The returns on equity fund are in the form of dividends as well as capital gains.
- In last 5 years, diversified Equity Funds have given an average (ie. Multi Cap Funds Category Average Return) of close to 17% per annum returns (as on Feb 28, 2019) For detailed Analysis of Multi Cap Funds, Refer https://mfyadnya.in/
disADVANTAGES of EQUITY MUTUAL FUNDS
- Not for Short term: Equity fund can’t be an investment option for short term. Since the returns are very volatile for short period.
- No Control: Investor has no control over his/her investments as all the decisions are taken by the fund manager.
- Higher Costs: Since the funds are professionally managed they entail higher costs. There are fees associated with investment in mutual funds. For Example- HDFC Equity Fund has an expense ratio of 2.04% per annum.
- Choice Overload: There are over 500 schemes of Equity Mutual Funds to choose from, with many different objectives. You should always talk to your advisor before finalizing the scheme.