Equity mutual funds have potential to provide risk-adjusted long term returns. You can choose to invest in equity funds such as diversified equity funds, ELSS (Equity Linked Savings Scheme) or large-cap funds, or even emerging themes in Equity investments such as ESG (Environment, Social and Corporate Governance) equity funds, etc.
The benefits of equity mutual funds include:
- Professional fund management: Managed by professional fund managers who research and analyze the performance of various companies, and invest in the stocks that could deliver long term risk-adjusted returns to the investors.
- Easy on the wallet: You can invest in equity funds through the SIP (Systematic Investment Plan) mode, wherein you can make weekly, monthly, or quarterly investments as low as Rs. 500.
- Power of compounding: Grow your wealth with the power of compounding where your earnings get reinvested and compounds over the long term.
- Potential to Cope better with inflation: You need to look for investments that provide more returns than the prevailing inflation rates. Equity has the potential to cope better with inflation in long term ..
- Rupee cost averaging: Equity Mutual funds are more volatile than debt mutual funds. Your equity mutual fund is not likely to provide consistent returns during the period you are invested in the fund. Some years you might earn more, while other years you might earn less. SIP in equity fund help to beat the volatility of the equity markets through rupee-cost averaging.
- Portfolio diversification: You can achieve portfolio diversification and your investment risk is spread across various stocks when you invest in an equity mutual fund. Thus, even if some stocks in your portfolio underperform, the strong performance of the other stocks would offset some of that risk and help build your investment corpus.
Equity fund taxation is 15% for the short term. If you invest for the long-term, you do not have to pay tax in case the equity fund investment is held over a year and the returns do not exceed Rs. 1 lakh. And secondly, any tax over a holding period of 1 year is considered as long-term capital gain and is taxable at 10% for gains exceeding Rs. 1 lakh. In the case of ELSS mutual fund, you can enjoy tax deduction under Section 80C of the Income Tax Act, 1961, and save up to Rs. 46,800 for the highest tax bracket each year, effectively reducing your tax liabilities.
To sum up, to be a long-term investor, you need to be willing to accept a certain amount of risk in pursuit of potentially higher returns over a longer period. It requires patience and perseverance, requiring you to stay invested for a long period.
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