Equity Mutual Funds: Know advantages of investing in equity mutual funds

Investing in equity mutual funds is a great way to earn attractive returns even though it's a risky avenue. Many investors are now choosing mutual funds due to higher return compared to other traditional savings instruments. As the mutual funds are prone to market volatility, there is a higher risk associated with such investments. However, diversification of portfolio and professional management can mitigate the potential risks.

Mutual funds are a popular investment option these days due to higher returns, professional management of funds, diversification of portfolio and a wide choice across segments. The most common way of investing in a mutual fund is dealing in equity mutual funds, debt mutual funds and hybrid mutual funds.  

As many investors are gradually shifting to  equity mutual funds, let's take a look at the advantages and other important factors to consider before investing.

What are equity mutual funds?

Equity mutual funds are a category of funds which invest your money in equity or the stock market. The investment is made across several stocks from the various sectors of the industry to diversify the investment portfolio to manage potential risks. The investor profits from the price increase in the stock over time, however, a price decrease does wash away a portion of profits. But, professional fund managers try mitigating the risk and invest in a way that the investors get a good return.

What are the advantages of investing in equity mutual funds?

Risk management: Since the equity mutual fund portfolio is spread across various sectors, the potential risks are managed well. Moreover, professionals would be handling your investment and  hence, their expertise would help you to get attractive returns.

Game-changer for small investors: Indian investors, especially small scale investors, are moving towards investing in mutual funds as it works by pooling money from several investors. Therefore, to make profits, one doesn't need to invest a lump sum on their own and can start by making small investments of Rs 2,000 as well or they can choose to pay an SIP of Rs 500 per month.

Tax advantage: Many equity linked mutual funds offer tax benefits. These funds don't attract taxes like FDs or other investments, including saving schemes. Equity mutual funds are taxed only during redemption or dividend receipt and no taxes are imposed during the period you have invested in it.

Short-term equity mutual fund investments, that is, investing for less than 12 months would attract a capital gain tax of 15 per cent along with applicable surcharge and cess. However, if you hold the investment for a long term, up to Rs 1 lakh of income is exempted from tax while long term capital gains tax will be applicable at 10 per cent. The tax rates are comparatively lower than other investment options, which is why several investors are moving towards investing in equity mutual funds.