In this article
1) Advantages of Equity Mutual Funds
2) Disadvantages of Equity Mutual Funds
Equity mutual funds stand at the apex among all asset classes. This is because the advantages of equity mutual funds gives it an edge among all other asset classes. But before investing in equity funds investors should also know about the disadvantages of equity mutual funds.
Here are the advantages and disadvantages of equity mutual funds that can help investors to get a better understanding of equity funds and thereby invest accordingly and righteously allocate the funds in equity by analysing their investment objective and risk appetite.
Advantages of Equity Mutual Funds
- Expert management: Equity funds are monitored by experts with an immense knowledge of mutual funds. These expert fund managers know every aspect of mutual funds. They analyse the markets and alter funds (whenever required) accordingly to leverage the market trends.
- Tax benefit: ELSS (Equity Linked Savings Scheme - a type of equity fund) as per the Section 80C of the IT (Income Tax) Act, 1961, offers tax benefit of up to ₹ 46,800/- by investing ₹ 1,50,000/-.
For other equity mutual funds, tax is levied as per the STCG and LTCG norms.
- Diversification: This reduces the risk exposure of equity funds due to the widespread of your investments across the stocks of various companies. This helps to spread out your risk across various instruments.
- High returns potential: Equity investing majorly invests in stocks of companies. Stocks represent proportionate ownership of a company's business and its profits and losses. Due to this, they have high returns potential that can outpace the market average.
- Convenience: One can invest in one-go with lump sum investment mode or like an instalment with SIP investment mode. For monthly salaried employees who can’t invest in one-go then SIP is the best option for them.
- Liquidity: The redeemed amount from equity funds are credited to your bank account in three days due to which equity mutual funds offer high liquidity.
- Affordable: One can start investing with an amount as low as ₹ 500/- in equity mutual funds by starting their SIP at a predefined time interval. This makes it easier on our wallets when it comes to investing.
Disadvantages of Equity Mutual Funds
- Management Cost: Since the funds are managed by professional fund managers one has to expect a certain fee that is liable to pay for their expert management.
- Not for Short Term: Since equity mutual funds are highly reactive to market volatility, investors need to invest for the long term to bring out its best essence. Short term investing in equity can prove to be highly risky because of the uncertain nature of markets.
- Choice Overload: There are more than 1000+ equity schemes for investors to choose in mutual funds. This makes it really challenging for investors to choose from such a widespread spectrum of equity schemes. Investors have to be very careful while choosing from such options because mistakes may happen while choosing equity funds if you are not careful.
- Lock-in period: ELSS funds which are a type of equity mutual funds that offer the tax benefit under the Section 80C of the Income Tax (IT) Act have a lock-in period of 3 years. This simply means investors cannot choose to vote out from the scheme before the completion of its maturity period.
- Poor Management: If the fund manager abuses his authority and constantly churns the portfolio then it simply increases your expenditure on fees. This can lead you to gain suboptimal returns.
These are the advantages and disadvantages of equity mutual funds. Investors are advised to careful study each and every aspect of equity mutual funds before diving in this realm. Allocate your funds as per your risk-taking ability and invest accordingly in equity funds.
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