What are the advantages and disadvantages of investing in equity mutual funds?

Equity mutual funds invest most of the money gather from investors into stock market. The risk level in equity mutual funds are quite high and investors are advice to invest in these funds as per their risk appetite.

Advantages:

1. Capital appreciation - Equity funds are known to provide higher returns as compared to other funds, such as Debt funds. They can help an investor generate huge wealth in the long run.
2. Professional Expertise - Fund managers have experience in managing portfolios and investors can rest assured that their hard earned money is in safe hands.
3. Tax benefits - ELSS funds provide to its investors tax benefits to the tune of ₹1,50,000 under section 80C of the Income Tax Act.
4. Small systematic Payments - Systematic Investment Plan (SIP) allows investors to deposit a small sum of money at regular intervals. Useful for those who do not want to invest their money at one go. Helps investors achieve the benefit of averaging.
5. Liquidity - Most equity funds (except ELSS) are liquid in nature, meaning investors can withdraw their money whenever they chose to do so.

Disadvantages:

1. Higher costs - Since the funds are professionally managed they entail higher costs such as salary of fund manager, exit ratio among others.
2. Higher risks - Equity funds entail higher risks as compared to debt funds and are not suitable for those investors who want a lower risk for their investment.
3. Lock in - ELSS funds have a lock in period of 3 years, hence less liquid.

A lot of people follow stock markets and wish to invest in the shares offered by various companies, but they fear that they don’t have enough knowledge or don’t have sufficient time to keep track on and follow the latest buzz about the dynamic market. Equity mutual fund is the perfect solution for them as investing directly in equity market is a risk, not everyone willing to take.

Equity mutual fund Invest most of the money gather from investors into stock market. 

These are the advantages and disadvantages of investing in equity mutual funds:

Happy Investing!

Advantages of investing in equity fund Schemes

1.    Professional Management- Investments in these funds are managed by professional fund managers who invest in the stocks with highest returns pertaining to a particular risk level which might not be easy to find for individual investors. They follow proper methods of equity research to pick the best stocks and outperform the benchmark index.

2.    Investments in equity mutual funds usually give a higher return than investments in fixed deposits of banks and post office savings schemes.

3.    Systematic investments plans option- Investments in equity mutual funds can be made in the form of SIP thus helping in creating long term wealth accumulation over a period of time along with the benefits of rupee cost averaging.

4.    Flexibility- Equity mutual funds do not have any fixed lock-in period and thus give their investors the liberty of withdrawing their money at any point of time without any exit load.

5. Regulations – Mutual fund companies are regulated by SEBI in India and have to follow strict guidelines and rules, this in turn gives financial security to investors and makes sure they are not overcharged by these fund houses.

Disadvantages of investing in equity mutual funds

1.    Fees- Equity mutual funds usually charge an expense ratio to their investors as a percentage of their assets under management. This fees marginally reduces the return for their investors. These expenses depend on factors like the level of specialisation, investment strategies, AMC policies etc.

2. Suitability- An equity mutual fund may slightly differ with the investors's objectives in terms of risk, objectives, returns etc. Also an investor may want to give more weight to a particular sector or stock but cannot do in case of mutual funds as these schemes are standardised for all the investors.

Advantages of investing in equity mutual funds:

-Liquidity: Equity mutual funds provide you the option to redeem your investment at any time (except for ELSS which is locked-in for three years) and hence are quite liquid.

-Tax Benefits: The capital gains from equity mutual funds are exempted from taxation if the period of investment is more than one year.

-Portfolio diversification: You get exposure to various number of stocks under equity mutual funds. This helps in reduction of risk and therefore less chances of losing money. You can begin with an amount as small as Rs. 500. When compared to direct investment in stocks, equity mutual funds are affordable and diverse at the same time.

-Professional Management: You get professional management to handle your funds. These experts invest a lot of time in researching about the past and future performances of various companies.

Regular investments: These funds give you the opportunity to invest in small amounts at regular intervals.

Financial Goal Oriented: Equity mutual funds can be one of the best means to achieve your financial goals. These funds are divided into large cap, mid cap and small cap and the returns vary as per the risk associated with each one.

Disadvantages of investing in mutual funds:

-Expenses: The professional management teams that manage your funds charge a high price. These salaries are paid by the shareholders' funds and therefore reduce profits.

-Potential Losses: Equity mutual funds cannot be insured against losses unlike some other investments. These mutual funds are volatile.