Why should you consider equity fund investments despite the risks?
A mutual fund variant that young professionals prefer is equity funds. Equity funds allocate funds to equities and related securities. An equity fund investment is a risk-reward type of mutual fund investment. While these funds come with high risks, they also come with the potential to generate higher returns than other investment options. However, the performance of an equity fund relies on the conditions of the equity market situation.
Then, why are equity funds viable despite the risks involved?
Even if they are risky, you must invest in equity funds because of their capacity to generate higher returns. Apart from that, there is the element of age involved. Your risk tolerance is higher if you are young. On the other hand, equity funds are not suitable for risk-averse and older investors. Here are some benefits that you may enjoy by investing in equity funds:
- Fund diversification:
Equity funds allocate funds to multiple stocks, sectors, and asset classes. As an equity investor, you own a share in the equities of companies of different capitalisations and sectors. Diversification offers twin benefits like high returns from the profits of all the asset classes. Or you can reduce the risks associated with the underperformance of an asset class. Furthermore, a portion of your income is also allocated to fixed-income securities and other money market instruments, diversifying your investment portfolio.
- Risk mitigation:
Because of fund diversification, the fund manager spreads your corpus across different stocks and the associated risks and profits. So, if a stock, asset class or sector is underperforming, the other may pick up. This feature reduces the loss incurred as you are not dependent on a particular asset class or industry.
- High liquidity:
Equity funds are highly liquid, i.e., you can redeem your investments whenever you want. After your redemption, you will receive your money in your account in a few days. These funds don’t have a lock-in period, with one notable exception. ELSS or equity-linked savings schemes. They are an equity fund variant that comes with a lock-in period of three years.
- Compounding benefits:
The interest or the profits from mutual fund investments are re-invested in the fund for purchasing more units. This strategy helps you acquire higher capital over time.
- SEBI regulation:
AMCs or asset management companies have to follow the SEBI rules for the functioning of mutual fund schemes offered by them. You will also come across the AMFI (Association of Mutual Funds in India), a self-regulatory body under SEBI’s supervision. Under the SEBI rules, AMCs must release statements of all their mutual fund schemes. These statements must have details like the expense ratios, the fund managers’ information, asset allocation information, and NAVs.
- Professional management:
Experienced analysts manage mutual fund schemes professionally. They thoroughly study the market trends to ensure your fund outperforms the benchmark indices. Fund managers are responsible for generating higher returns than the market indices.
Despite all the investment risks, equity funds can offer you higher returns over the long term. Your job as an investor is to determine your financial goals, investment horizon and risk tolerance. After identifying the factors above, you must go ahead with your equity mutual fund investment.
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