Many investors seek greater return products when they invest in mutual funds. Equity Funds are recognised for it, after all. These funds have a track record of producing solid returns over the long term. Mutual funds that invest a significant portion of their assets in stocks or other equities are known as equity funds.
One of the effective methods to own a business (in a small percentage) without investing or founding a company directly is to purchase an equity fund. Depending on their goal, these funds may be handled actively or passively.
Your portfolio will grow faster thanks to equity funds than inflation
Increasing your capital more quickly than inflation is one of the most crucial factors to consider when selecting any investment product. The annual increase in the cost of goods and services is known as inflation. Even if your investment generates a positive return, you will ultimately lose money if it cannot cross it.
Assuming you invest in 4 different goods with various returns, annual inflation is measured at 7 per cent.
Using equity funds, create a diversified portfolio
Building a solid portfolio that keeps you on track is necessary for achieving a long-term financial objective. You require a portfolio with the ideal balance of risk-reward ratios.
Using equity mutual funds, you can diversify your portfolio by investing in various equity fund types with varying risk-reward possibilities.
Taxability of Equity Funds
As fund houses paid Dividend Distribution Tax (DDT) before paying investors their part of dividends, dividends were previously made tax-free in the hands of investors. The dividends given by all mutual funds are now included in your overall income and taxed according to the income tax bracket you are in according to changes introduced in Budget 2020. This is known as the traditional method of taxation of dividends.
The holding duration affects the tax rate for equity funds. Regardless of your income tax bracket, short-term capital gains (noticed on redemptions made within a year of the holding period) are taxed at a rate of 15%. Up to Rs 1 lakh in long-term capital gains each year—gains realised after a holding period of one year—are exempt from taxation. Profits above this threshold are subject to a 10% tax rate, and indexation is not offered.
Benefits of equity funds
Excellent opportunity for long-term investments
Equity funds provide astronomical returns for investors who hold their investments for at least five years. As a result, these funds make a great long-term investment choice.
You could consider investing in ELSS mutual funds to reduce your tax liability under Section 80C and gradually increase your wealth. You can profit from tax deductions and long-term wealth accumulation by investing in these funds, which are the ideal alternative for tax-saving investments.
Investments by equity funds are made in equity and equity-linked securities of businesses in all industries and market capitalization ranges. Investors profit from diversity as a result.
A mutual fund that invests in equity must place at least 65% of its assets in equity and equity-linked instruments. Depending on the investment mandate, these funds can either be actively or passively managed. The best equities mutual funds provide outstanding returns over the medium to long term.
Stocks of various companies are the main investment of equity mutual funds. A fund is deemed equity-oriented by the Securities and Exchange Board of India (SEBI) if it invests 65% or more of its portfolio in stocks.
Equity funds are considered significantly riskier than debt and hybrid funds because they invest only in stocks. Investors can substantially reduce market volatility by using the SIP investment method. These funds provide great investments for achieving long-term financial goals.