This article will see 7 Advantages & Disadvantages of Equity Funds. So, how can equity funds be an ideal investment vehicle for investors?

Should I Invest in Equity Mutual Funds?

Introduction

Equity mutual funds primarily invest in stocks to benefit from rising stock prices. No other investment vehicle offers such high returns as Equity Mutual Fund. This article will see 7 advantages and disadvantages of mutual funds. How can an equity fund be an ideal investment vehicle?

SHOULD I INVEST IN EQUITY MUTUAL FUNDS?

YES, you should invest in Equity Mutual Funds for all your long-term financial goals. It may include Retirement, Child’s education, Child’s Marriage, or any other purpose which is at least 5 years away. Following are the merits and demerits of mutual funds in India. 

ADVANTAGES OF EQUITY FUNDING

1. Diversification

Diversification in the portfolio of funds 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 automatic diversification in many different stocks. For Example, HDFC Equity fund has 50 stores in its portfolio. 

2. Liquidity

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 3 years). You can redeem all your investments in the time of need or when a Net Asset Value (NAV) is 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 one 1year). For Example – HDFC Equity trusts an exit load of 1% if the investment is saved in the first 365 days. This is one of the best benefits of equity mutual funds.

3. Professional Fund Management

An Asset Management Company (AMC) works professionally with individual research, analysis, and experts carrying out trading. 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 will help in selecting the best mutual fund for you and they also visit conferences and interact with companies they invest in. 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 in the future. Thus, most 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 need a relatively large amount of funds. In an equity fund, you can start by owning a well-diversified portfolio for as little as Rs.500 (through a monthly Systematic Investment Plan). You can create your investment with as low as Rs. 5000 as a lump sum and Rs. Five hundred as SIP and can own a big basket of stocks. But beware of disadvantages of sip while investing in them.

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 beginners to invest in equity mutual fund schemes. These small sums that you invest regularly are invested in buying stocks. This also develops a regular habit of funding which is helpful 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. The government of India also provides tax rebates for equity-linked saving schemes (ELSS) u/s 80C of Income Tax Act 1961. You can invest in ELSS and deduct up to 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 than other funds, such as Debt funds. The returns on equity funds are in dividends and capital gains. In the last 5 years, diversified Equity Funds have given an average (i.e., Multi-Cap Funds Category Average Return) of close to 17% per annum returns (as of Feb 28, 2019). For detailed Analysis of Multi-Cap Funds, Refer to https://mfyadnya.in/

DISADVANTAGES of EQUITY MUTUAL FUNDS

Now we will discuss some of the disadvantages of mutual funds in India.

1. Not for the Short term:

One of the limitations of mutual funds is that the equity fund can’t be an investment option for a short time. Since the returns are very volatile for a short period.

2.  No Control:

Investor has no control over their investments as the fund manager takes all the decisions.

3.  Higher Costs:

Another disadvantage of mutual funds in India is that they entail higher costs since the funds are professionally managed. There are fees associated with an investment in mutual funds. For Example- HDFC Equity Fund has an expense ratio of 2.04% per annum.

4. Choice Overload:

There are over 500 schemes of Equity Mutual Funds to choose from, with many different objectives, which becomes another major disadvantage of share market.  It would help if you always talked to your advisor before finalizing the scheme.

Conclusion

Equity mutual funds are one of the popular investment options among investors. It has vast financial potential, and the returns generated are pretty substantial. Although equity funds are generally for long-term investment, they can also be used for short-term trading. If a person is unsure about their risk-taking ability and does not have a clear picture of their future requirements, then equity funds will not be ideal. So, after discussing the advantages and disadvantages of equity shares and analyzing everything, we suggest that it is better to allocate equity funds as per your risk-taking ability; by here, you will get an idea about your investment pattern and investment option.