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Investors who are the search for investment options that can help them create wealth from their savings must consider investing a part of their savings in equities and equity-related instruments. This could be either equity mutual funds or direct stocks or ELSS tax saving mutual funds, and the list goes on. Now the proportion of the investment in equity investments must entirely depend on one’s investment portfolio, their financial goals, risk capacity, investment duration, and other relevant parameters. In this article, we will understand why an investor must allot a part of their savings to invest in equities or equity mutual funds. Let’s quickly beginning by understanding what an equity fund is.

What is an equity fund?

Equity funds, also known as growth funds, are a type of mutual funds that invest majority of their assets in stocks or shares of different companies. The mutual funds’ regulatory body of India – Securities and Exchange Board of India, commonly known as SEBI has mandated all equity mutual fund schemes to invest a minimum of 65% of their assets in equities and equity-related instruments. Similar to any other types of mutual funds, equity mutual funds can be either passively managed or actively managed.

Why should an investor invest in equities or equity mutual funds?

Following are a few top reasons why an investor must consider investing in equity mutual funds:

  1. Potential to earn significant returns – History is a testament to the fact that equity mutual funds have proved to offer higher returns to investors than other investment options such as debt funds. Thus, equity investments are a good investment option to earn inflation-beating returns.
  2. Tax benefits – Certain types of equity funds such as equity-linked savings schemes or ELSS funds offer a tax benefit of up to Rs 1.5 lac per annum to investors as per Section 80C of the Income Tax Act, 1961. This as a result provides investors the opportunity to save tax up to Rs 46,800 each year by investing in tax-saving investments provided that they belong to the highest tax income tax slab brackets.
  3. Diversified investment portfolio – Equity investments are exposed to different types of sectors across varying market capitalisations to limit the concentration of risks experienced by equity investments. This helps to diversify an investor’s portfolio and it works in their favour as during periods of bull market phase, even if certain stocks tend to underperform than their underlying benchmark indices and other peer funds, the stocks that are outperforming the markets can help to compensate for the losses from one type of equity investment.

Investors are advised to invest in equity funds with a long-term investment horizon of say 10 years or more. This is because equity investments tend to highly volatile in short duration. Whatever type of investment you decide to go forward with, make sure that the objectives of the funds are in line with your financial goals, investment duration, and risk capacity. Happy investing!

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