5 Things You Should Know Before Investing in Equity Mutual Funds
Mutual funds are a favourable way to grow your savings and accumulate wealth in the long term. Although mutual funds are of different types, equity mutual funds are perhaps the most popular ones of all. And for a good reason. They give decent returns in the long term and can help you fulfill your financial goals.
Keeping a few factors in mind before investing in equity funds can ensure that your investments align with your objectives. Let us see what these factors are.
1. Selecting the Appropriate Investment Method
Equity mutual funds allow you to invest your money in sectoral or thematic funds. You can choose to invest in small-cap, mid-cap, or large-cap funds. If you have low-risk tolerance, it is advisable to invest in large-cap funds. These stocks always give you decent returns, but they are not very high. Aggressive investors can consider small-cap or mid-cap equity funds. Although they are risky, they give high returns over the long term.
2. Time Horizon
You may not want to consider equity mutual funds for financial goals that you want to achieve in the next 1–3 years. As the stock market is prone to volatility, your investment may deplete in the short term. Moreover, if you choose EL SS, your investment gets locked for three years.
Equity funds are ideal for long-term goals, like retirement planning or children’s education. However, you should consider them only if you are still in your 20s or 30s.
3. Diversification
There are several types of equity mutual funds available for investors to explore. Each fund is different and formulated after a careful study of the market. Building an equity fund portfolio and diversifying your investment can lower your risk and optimize returns.
4. Investment Mode
In today’s time, you can invest in equity mutual funds using several methods. The first option is to invest directly with the AMC that manages the equity fund. Another option is to go through a broker or distributor. In this case, you will have to pay a commission. However, these professionals can help you with valuable advice to select an appropriate mutual fund as per your needs.
You can also explore online platforms that simplify the investment process. Moreover, they can give you discounted deals.
When investing in equity mutual funds, you can give a lump sum or take the Systematic Investment Plan route. You can choose the former option if you have extra cash that you would like to invest, and the stock market is currently favorable. It is best to avoid putting a lump sum into an equity fund if the stock market is rallying.
SIPs require you to invest a particular amount every month and are an excellent way to instill an investing discipline. Moreover, it is more economical as you don’t have to take out a substantial amount from your savings in one go. When the market goes down, you can buy more units of the fund. It is called Rupee Cost Averaging, which helps you in gaining more returns in the long run.
5. Tax Benefits
It may come as a surprise to some of you, but equity mutual funds can help you reduce your taxable income. These are the ELSS funds that can give you an exemption under Section 80C of the Income Tax Act. However, they have a lock-in period of three years. Consider them only if you will need this money within this period.
Final Word
Equity mutual funds are one of the best ways to invest your money and build a profitable portfolio. After considering the aspects given above, you can ensure that your investments meet your goals, are in tune with your risk appetite, and help you fulfill your goals. For further expert guidance, visit PGIM Mutual Fund.
