Diversified equity mutual funds invest in equity shares of listed companies across various sectors and market capitalization sectors. Diversified equity funds buy and hold securities with the objective of capital appreciation over a long investment period. Fund managers may periodically churn their portfolios and in the process, the booked profits can be distributed to investors either in the form of dividends (in dividend options) or through the power of compounding (in growth options). The funds can be reinvested in the scheme to generate future profits through the medium.
Risk reduction in equity investments
One of the major advantages of diversified equity mutual funds is the risk reduction in equity investments. When we invest directly in stocks, we are exposed to company risk, sector risk, and market risk. By investing in a diversified portfolio of stocks across different sectors, equity mutual funds are able to diversify substantially across company-specific risks and sector exposures. Therefore, downside risks due to poor performance of a particular company or sector are very limited, and diversified equity funds are only subject to market risks.
The other major advantage of investing in equity mutual funds versus company stocks is that mutual fund investors can take advantage of the fund managers' experience and expertise in stock selection. By relying on the expertise of experienced fund managers, investors can get better wealth creation and wealth protection.
We have seen earlier that Sensex was able to outperform other asset classes over longer investment horizons. Fund managers aim to beat market returns and past data shows that well-diversified equity fund managers consistently beat the market by a large margin to create substantial wealth and wealth preservation for investors. Diversified mutual funds offer investors the benefits of disciplined investing through systematic investment plans (SIPs). Through SIP, you can save and invest a part of your savings every month to be used during rainy days. The money is debited from your savings bank on a certain day every month (some AMCs have started SIP on any given day) and invested in a mutual scheme of your choice.
One of the major advantages of SIP in diversified equity mutual funds is that it makes the market timing (buy short and sell high) irrelevant. It is not possible to predict exactly how the market will behave. By investing at a regular frequency, eg. Monthly, one is invested at both the high and low points of the market.
By averaging the cost of investment, SIPs work well in uncertain markets.
Over time, one can accumulate huge corpus through mutual fund systematic investment plans, as we will illustrate in this example. If you save Rs 2,000 every month and invest through SIP in a diversified mutual fund scheme over a period of 20 years, assuming you get a 15% return on your investment, you can earn around Rs 30 lakh able to deposit a corpus of Rs. This example shows the wealth creation potential of diversified equity funds through SIPs.
Investors often overlook the impact of taxes when making investment decisions. Taxes reduce the net return of investors and, therefore, investors must take into account the impact of taxes on investments. Equity mutual funds, enjoy remarkable tax advantages compared to other asset classes. Long-term (invested for more than 12 months) capital gains from equity funds are tax-free. Short-term (invested for less than 12 months) capital gains are taxed at 15%. Dividends paid by equity funds are also tax-free.
Diversified Equity Mutual Funds are one of the best long-term investment options for retail investors. As such they are suitable for various long-term financial goals like children's education, retirement planning, etc. Investors should consult with their financial advisors if diversified equity mutual funds are a good fit for their investment portfolio.
Blueant Finserv is the best wealth management company that provides wealth preservation, wealth protection, and wealth creation to its clients. Our financial advisors, Rohit Raman, and Sachin Narang suggest the best plans to the clients and interact with clients personally and their business nature.
Diversified Equity Mutual Funds are one of the best long-term investment options for retail investors. As such they are suitable for various long-term financial goals like children's education, retirement planning, etc. Investors should consult with their financial advisors if diversified equity mutual funds are a good fit for their investment portfolio.
Blueant Finserv is the best wealth management company that provides wealth preservation, wealth protection, and wealth creation to its clients. Our financial advisors, Rohit Raman, and Sachin Narang suggest the best plans to the clients and interact with clients personally and their business nature.
