5 Benefits of Investing in Equity Mutual Fund Schemes

Published On: 27-Aug-2020

When it comes to investing in mutual funds, data suggests that the investors are highly inclined to invest in equity fund. As on 31st July 2020, 6.37 lakhs investor folios feature equity schemes across the mutual fund industry, occupying a 69% share in the overall investor folios with the total Assets Under Management (AUM) of Rs. 7.37 lakh crores. 

Source: Association of Mutual Funds in India – AMFI

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Equity funds create an underlying portfolio of equity shares predominantly, and such inclination of the investors may be primarily attributed to the inherent advantages of equity funds for financial planning.

Here are five benefits of equity mutual funds:

Professional Fund Management 

When it comes to equity investing, it is often advisable that one should not invest directly in equity shares unless one understands the nuances of equity markets. Instead, one may take the route of equity mutual funds, which allows the investor to avail of professional fund management and enjoy the potential of better returns over the long term. 

Portfolio Diversification

By investing in equity mutual funds, one can enjoy exposure to multiple stocks with a single investment product, thereby achieving portfolio diversification. The fund managers choose such stocks based on the fundamental strength, the growth potential of the individual stocks, and the scheme's investment objective. Portfolio diversification may help investors mitigate the investment risk since different stocks may react to similar situations, events, etc. differently. 

Systematic Investments

Equity funds allow the convenience of investing through Systematic Investment Plans (SIPs), Investors can register a SIP for an amount as low as Rs. 100 in specified periodicities, viz. daily, weekly, monthly, etc. in predefined mutual fund schemes. 

This inculcates a sense of financial discipline, as the investments are regularly made irrespective of market movements. Similarly, investors may also register SWP (Systematic Withdrawal Plan) to withdraw their investments periodically to fulfil the regular cash flow requirements, once the desired investment corpus is achieved.

Tax Benefits on Investment

As per the income-tax laws, investment in specified category of equity funds, viz. Equity Linked Savings Scheme (ELSS) is eligible for tax deduction under Section 80C of the Income Tax Act. Such deduction can be availed up to an amount of Rs. 1.50 lakhs in a financial year, for all the eligible payments/ investments considered in aggregate. 

ELSS Funds carry a lock-in period of 3 years from the date of investment and can be redeemed at the investor's option after the expiry of the lock-in period. As such, the investors can even link ELSS investments with their financial goals expiring beyond three years. 

Special Tax Rates on Equity Fund Returns

The returns from equity funds are taxed as capital gains only when such benefits are realised after mutual fund units' redemption. Such gains are considered Short-Term Capital Gains (STCG) if the holding period (i.e., the time between the date of investment and redemption) is less than 12 months and taxed at a special rate of 15% (plus applicable cess and surcharge), irrespective of the tax rates applicable to the investor ranging up to 30%. 

Similarly, the Long-Term Capital Gains (LTCG) with a holding period of 12 months or more are taxed at 10% (plus applicable cess and surcharge). The tax laws also provide an exemption of Rs. 1 lakh every year towards LTCG from equity shares and equity-oriented mutual funds in aggregate

With the above benefits, investors can aim for long term wealth creation by investing in equity mutual funds. 

Note: The tax provisions, as mentioned in the article, are for illustrative purposes only, and are updated as per the Union Budget 2020 passed by the Parliament. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale and not on the date of investment.