Mutual funds are one of the best ways for retail investors to profit from the uptrends in the markets. An investor is offered with different types of mutual funds to choose from basis their varying needs.Investments with higher allocation to equities are believed to be best-suited for long-term goals. On the other hand, short-term goals require investments in relatively safer instruments such as debt mutual funds. Equity funds are always a popular option among investors owing to their huge potential to generate significant returns. This article is an investment guide for long-term equity funds and the best investment route for these securities.
What are equity funds?
Equity funds are a type of mutual funds that majorly invests in stocks. As per the guidelines of Securities and Exchange Board of India (SEBI), equity mutual funds are mandated to invest 65% of their assets in equities and equity-related instruments.
Another common equity investment is Equity-linked Savings Scheme (ELSS). If you are wondering what Equity-Linked Savings Schemesare, they are simply equity schemes that are mandated to invest at least 80% of their corpus in equity and equity-related instruments. These mutual funds provide the dual benefit of wealth creation and tax-saving attributes.
Equities have a higher potential to produce significant returns against any other asset classes when invested for a long duration. Hence, investors investing in equities are advised to have an investment horizon of at least 10 years. However, equity investments are associated with higher volatility. This means that the net asset value (NAV) of your equity investments might witness a dip for a period. Instead of redeeming your investments at this time, investors are advised to stay invested. Rather than trying to time the market, one might consider adopting the approach of time-in-the-market. Confused? In layman’s terms, consider investing in mutual funds via SIP
Invest in mutual funds via SIP
Systematic Investment Plan, commonly known as SIP is an investment tool to make period investments in mutual funds. Under SIP investment, regular investments are made towards desired mutual fund schemes for a period of time. SIP investments help to profit from the very volatility investors are afraid of, by automatically buying more mutual fund units when the NAV of a fund is low, and vice versa. This concept is known as rupee cost averaging. What’s more, SIPs also ensure that you do not go overboard when the NAV of the fund is high by fetching you fewer units of the scheme at those levels. Thus, SIP instills the much-needed financial discipline among investors.
Though equity SIPs work best for long-term investing, you can also invest in equities by making a lumpsum investment. Understand the differences between the two investment tools and choose the one that best suits your portfolio. Happy investing!