eThe untold truth: Who should really be investing in equity funds?

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Equity fund investments have been steadily gaining popularity in India, reflecting a growing trust among investors in mutual fund schemes. In August 2023, equity mutual fund inflows in India reached a five-month high, showcasing the increasing interest in this investment avenue. Investors who have a greater appetite for risk and who invest for the long term generally invest in equity mutual fund schemes. Certain types of investors prefer equity mutual fund investments since they offer specific benefits such as long-term returns, an exposure to risk, and portfolio diversification.

Five categories of investors who invest in equity funds:

1. Investors who are investing for mediumtolong term:

Investors with a horizon of at least 5-7 years invest inequity mutual funds. This extended investment period allows for the potential benefits of compounding to help investors earn more. Over time, market volatility averages out, helping the investors earn higher returns as compared to other asset classes. For those willing to stay invested for the long haul, equity funds can be a rewarding choice.

2. Investors who want lesser exposure to risk:

When the investment portfolio of an investor is low on risk, investors look to increase it with the aim of earning higher returns. Investors can do this by investing in equity mutual fund schemes.Mutual fund houses recommend equity fund to investors who wish to increase the risk in their investment profiles since these funds are constantly subject to the fluctuations of the market. When compared to debt mutual funds, investors face an overall high risk through their equity mutual fund investments.

3. Investors who wish to earn more returns by diversifying:

An investor can reduce the impact of poor performance in one sector on their overall portfolio by diversifying their investments. This diversification can be particularly beneficial for investors looking to mitigate risk while seeking higher returns.

4. Investors who are looking for an initial exposure to the securities market:

Investors can start a Systematic Investment Plan (SIP) equity fund investment at lower prices. Equity mutual funds are ideal investment options forinvestors looking to begin an investment habit. Asset Management Companies hire experienced professionals as fund managers to manage these funds and take investment decisions on behalf of investors.

5. Experienced investors who want to invest across market capitalizations:

Equity mutual funds help investors diversify their mutual fund investments across market capitalizations.

Investors stand to gain in the following ways by investing in an equity fund:

1. Equity funds offer higher liquidity:

Unlike direct investments in stocks, equity mutual funds offer high liquidity. Investors can buy or sell units of these funds on any business day at the prevailing net asset value (NAV).

  1. Equity mutual funds cost lesser: The cost of managing an equity mutual fund is shared among all the investors in the fund.Additionally, equity funds have no entry or exit loads, making them a cost-effective investment option.
  2. SIP investments in equity funds can help investors earn high returns: Systematic Investment Plans (SIPs) allow investors to invest a fixed amount regularly, usually monthly. SIPs in equity funds are an excellent way to harness the power of compounding and rupee cost averaging.

Equity funds offer opportunities for wealth creation, portfolio diversification, and the potential for higher returns. Investors must align their investment horizon, risk tolerance, and financial goals with the right equity fund category. Investors can make informed decisions to grow their wealth over the long term by understanding who should invest in equity funds and the advantages they offer.

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