Finance

The reason why equity mutual funds are gaining popularity in India

Indians have long been famous for their traditional investment patterns, relying primarily on fixed deposits and gold to park their funds. However, Indians are no longer hesitant to participate in the stock market, and this is evident with the growing popularity of equity mutual funds. These funds invest predominantly in shares and stocks of companies. 

Despite the high-risk factor, investors are shifting to equity funds due to their potential for attractive returns. In fact, equity-oriented mutual funds registered a total inflow of Rs 20, 534.21 crore in March 2023. These numbers make it evident that Indians are now actively looking for investment opportunities that provide better returns. But, what is fueling this shift towards equity mutual funds

Factors such as a booming stock market, favourable government policies, tax benefits, diversification, increased financial literacy, and ease of investment are contributing to the growing enthusiasm of Indian investors towards these funds. Let’s analyse these aspects in detail.

1. Lesser risks

Equity investment typically involves a high level of risk. Investing in individual stocks without right timing and proper research can lead to a huge loss if market fluctuates. But equity mutual funds are diversified portfolios composed of various stocks, which minimises the risk of major losses due to price fluctuations in individual stocks. This diversification spreads the risk, so, even if one or two stocks underperform, the overall portfolio can stay positive. 

2. Professional management

Investors prefer the expertise, experience, and resources of full time fund managers who can actively buy and sell investments. This ensures that the portfolio is constantly monitored and rebalanced to meet the scheme’s objectives.

Moreover, fund managers use their knowledge and analytical skills to identify profitable investment opportunities and apply risk management strategies which is a bit difficult for individual investors. This level of management offers an advantage over other investment options particularly for retail investors who may lack the time, knowledge, or resources for active investment management. 

3. Customizable investment options

It is possible to choose from different types of equity funds depending on your goals, risk appetite, strategy, and returns expectations. There are large cap funds, mid cap funds, small cap funds, multi cap funds, contra funds, value funds, flexi cap funds, and more. Each fund follows a unique strategy that you can use to create a well rounded portfolio that balanced risks and returns.  

4. Better inflation adjusted returns

Inflation reduces the value of money over time, making it important to invest in assets that can outperform inflation. Equity funds, when carefully researched and invested in, have the potential to offer competitive return rates to mitigate the impact of inflation. 

Let’s consider an individual who invests in an equity mutual fund that consistently generates a 12% annual return while the average inflation rate stands at 5%. In this case, the investor not only earns a positive return but also surpasses the erosion caused by inflation.  

4. Benefit of disciplined investing through SIP (systematic investment plan)

SIP helps investors contribute a fixed amount at regular intervals in equity funds. This eliminates the need for market timing, as investments are made consistently, irrespective of market conditions. 

SIP also leverages rupee cost averaging which helps investors benefit from market fluctuations. During market lows, more units are purchased with the fixed investment amount, while during market highs, fewer units are acquired.

Most importantly, SIP helps investors to start with low contributions and increase the SIP investment amount with time to keep up with changing market conditions and inflation.  

To wrap up

India’s growing financial literacy combined with advancements in technology, has facilitated the expansion of equity funds’ reach. These funds not only offer an opportunity to invest in a diversified portfolio of securities, but they also provide liquidity, flexibility, and convenience. Moreover, the availability of digital platforms and mutual funds investment apps makes it easier to invest with just a few clicks. 

As long as these factors continue to exist, equity mutual funds are likely to remain a popular investment option in India.

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