Mutual funds, and specifically Equity Mutual Funds, as a way to invest have been around for a while. Their popularity in India is nonetheless a more recent phenomenon. This article will help you make sense of what Equity Mutual Funds are, and specifically, how they help you.
What are mutual funds?
A Mutual Fund basically pools money from multiple investors, such as you, and invests them in baskets of investments. These baskets form what is called a portfolio.
This means, your money is invested in a group of investments (either stocks or debt instruments), and in a simple, as well as accessible manner. On a basic level, mutual funds are classified as equity funds, debt funds, and money market funds on the basis of where they invest.
Equity Mutual Funds are the most numerous as well as popular form of Mutual Funds you will come across.
What are Equity Funds and how do they work?
Equity Mutual Funds invest the pooled investor money into shares of various companies. The gains or losses arising from the rise or drop in prices of these shares in the stock market decide the performance of the Mutual Fund.
When an investor invests in an Equity Mutual Fund, the price that they pay for each unit of the fund is the Net Asset Value (NAV).
Net Asset Value is the book value of the fund. Book Value is the difference between what the mutual fund owns (assets) and what the mutual fund owes (liabilities). The assets are shares that the fund bought. Liabilities are made up of expenses that are incurred for running the mutual fund.
The NAV is directly impacted by the price fluctuations in the stock market.
The investment activities of a mutual fund, equity or otherwise, are professionally managed by fund managers. These fund managers are capable as well as qualified individuals who are selected after a thorough review.
How can you invest in mutual funds?
Investment in equity funds can be made in two ways
1. One time investment: If you have extra money, a lump sum amount that you want to put away for future use, you can invest it all at one go.
2. Systematic Investment Plan (SIP): If you save small amounts from your monthly salary, systematic investments are a good way to invest. It allows you to invest your money in a hassle-free and disciplined manner. The primary benefit of a SIP is that it builds investing discipline and helps you start even if you have small amounts to invest.
Wondering which one is the better way to go? Read this.
How do you benefit from investing in Equity Mutual Funds?
You gain in the following ways:
1.Growth in NAV:
Net Asset Value of the fund increases if the market value of funds portfolio holding increases (after subtracting its liabilities and expenses). Growth in NAV denotes the higher value of investor’s capital. The profit investor makes here stays reinvested to earn more money. Compounding effect helps the investor with long-term growth.
2. Dividend Payout:
When equity fund earns profit in the form of dividend on the underlying stocks in its portfolio holding, it pays investors in the form of dividend payouts. Ideally this should be reinvested (by going for a growth option) in the fund to gain from compounding.
In case of equity funds, gains after a holding period of one year are considered long-term gains and are exempt from taxes. Also, dividends on equity funds are tax-free in the hands of investors.
Among the wide range of equity funds available, there are tax saving equity funds which come with a lock-in period of 3 years that help initial investors to save on tax. Investment in this particular equity fund is eligible for tax deduction under section 80C of the Income Tax Act.
To conclude, equity funds offer widespread diversification to investors with a medium and high risk appetite. Under the well regulated industry framework, it provides access to professional fund managers with a low transaction cost.
This makes Equity Mutual Funds a good investment choice for initial and small investors with the long term goal of growth in wealth at a higher rate of return. If you want to get started with equity mutual funds, Scripbox long term wealth is something you can consider. You can learn more about why Scripbox makes sense for you, here.
About the Author:
Rupanjali Mitra Basu is the Founder and Chief Training Enthusiast of FinProWise, a Financial Training and Content Shoppe. She has more than 12 years of training experience with a focus on Content in the BFSI Space.