Are you ready to invest in equity mutual funds?

By Shivani Bazaz
Many individuals start investing in stocks when they get to know that someone they know - it could be a friend, colleague or a relative - has made fantastic returns from stocks in a short period of time. These investors typically get anxious when the market gets into a prolonged bad phase. Several of them sell their investments and run away from the market. Most of them get spooked so badly that they never think of investing in stocks ever again. Such stories are common because some people focus only on eye-popping returns and overlook other aspects of investing in stocks. The situation can be avoided if investors spend a little time to familiarise themselves with the basic concept of investing in stocks. Are you ready to invest in equities? Read on to find out.

1. Always take the help of equity mutual funds

It is tempting to invest in an obscure stock that is supposed to give 300 per cent returns. However, the trouble is that it is not very easy to find such stocks in the market. By the time you get to know about a stock that is poised to offer stupendous returns, it might have already passed the half-way mark. Even otherwise, a regular nine-to-five worker would find it extremely difficult to research stocks, track them regularly, and execute buy and sell transactions on a regular basis. The solution is to hand over the job to a qualified professional and pay a small fee. Equity mutual funds do just that. You pay a small fee to get a qualified fund manager who would take care of investing your hard-earned money.

2. Invest in equity mutual fund only if you have at least five-year horizon

Equity mutual funds can be extremely volatile in the short term. If you are investing in equity with an investment horizon of a few months or a year, you may find that the investment has lost its value considerably when you need the money. You can avoid such situations only if you invest with a long term investment horizon of over five or seven years. Many studies have proven that stocks have the potential to offer superior returns than other asset classes over a longer period.

3. Don't let volatility scare you

Stock markets catch cold easily. A small development anywhere in the world could drag it down or prop it up. The result: stock prices yo-yoing and major indices swinging wildly to the tune of domestic or overseas news. A slightly extended period of volatility makes new investors extremely anxious. They constantly worry about the value of their wealth. This is not a great strategy to build wealth. It is also not good for your health. The solution: remind yourself that you are in for the long haul. Such volatile periods usually do not have a significant impact over a long period.

4. You can't avoid equity if you want to multiply wealth

Most of us typically have at least half a dozen financial goals. Sadly, we have one stream of income to fund all of them. This is exactly why you shouldn't let short-term volatility scare you away from the stock market. You should remind yourself that you must have to make inflation-beating returns to meet all your financial goals. This is especially true for those who are investing a modest sum. Investing small amounts regularly over a long period in equity schemes is the best way you build a nest egg to take care of your long-term financial goals like retirement, child's education, etc.

5. Equity offers tax-efficient returns

We just discussed how it is imperative to invest in equity to generate inflation-beating returns to meet long-term financial goals. Add to that tax efficiency of returns from equity. Apart from small saving schemes like PPF that offers tax-free returns, equity is the only asset class that qualifies for tax-free returns. Investments in equity mutual funds held over a year qualify for long-term capital gains tax which is zero at the moment.