If you want to protect your capital while earning some returns, you can opt for public provident funds, fixed deposits, or a high-yield savings account. However, if you are looking to generate higher returns than fixed-income deposits to meet your financial goals faster, then you should consider opting for equity mutual funds.
An equity mutual fund is a pooled investment that draws funds from several investors and invests them in different stocks to meet a specific investment objective. Equity mutual funds are thus even called stock funds, which are gaining high popularity as they are one of the best investment products with the potential to beat inflation and generate higher returns than fixed-income instruments. Despite some risks that this investment option comes with, the benefits of making equity fund investments through a SIP are the major reason why many investors consider investing in it.
Why is the SIP route considered valuable for making equity investments?
SIPs permit you to invest a predefined amount periodically, say weekly, monthly, quarterly, etc., in a mutual fund of your choice. As the SIP amount is deducted automatically from your bank account on a fixed date, it inculcates financial discipline and the habit of making regular investments. Additionally, as the minimum investment amount in most equity funds is as low as Rs 500, even if you have limited income, you can access the stock market by investing in equity funds through an SIP. Periodic and automated SIP investments even ensure rupee cost averaging by buying higher units at a lower net asset value in times of bearish phases. It helps in averaging investment costs and even removes the need to time your investments and keep track of the market.
Now that you know the benefit of investing in SIPs, read on to know the important reasons to consider equity funds to invest through an SIP.
Compelling reasons to invest in equity funds through an SIP
- Diversification
Equity mutual funds provide diversification by investing in different stocks, sectors, and asset classes. As a mutual fund investor, you can own stocks or shares of companies throughout different market capitalisations and sectors. This way, you can benefit from profits of different sectors and capitalisations and lower the risk through even fund distribution. Moreover, the presence of money market securities and fixed-income instruments in equity mutual funds further balances and diversifies the mutual fund investment portfolio.
- Risk mitigation
Owing to diversification, the fund’s corpus is spread evenly across different stocks. This also spreads the associated gains and risks. When one stock in an equity mutual fund underperforms, other stocks might pick up. Likewise, if one sector falls, others might balance the mutual fund portfolio, thus lowering the thorough loss incurred. This lowers the stock as well as sector-specific risk substantially, as the fund is not dependent on a single industry or stock.
- Professional management
Equity mutual funds are professionally managed by fund managers and analysts who have great expertise in managing the investment. They analyse and research the different market trends and stocks and try to ensure that the mutual fund outperforms its benchmark indices. Thus, if you lack the willpower, skill, or time to keep track of the market or cannot predict the performance of the stock, you must consider making an equity mutual fund investment. This is because fund managers are there to do their best to provide you with optimum returns.
- Wealth creation
Equity fund investments tend to yield the highest returns among most investment types. They also hold the capacity to provide inflation-beating returns. Moreover, equity investments through SIPs allow you to invest an extremely small amount of as low as Rs 500. Hence, you can start investing early by contributing a small amount per month to derive the most from the compounding effect and earn a higher amount through smaller contributions. For example, a monthly investment of just Rs 1,000 per month via SIP in a particular equity fund for 30 years at an assumed return rate of 12% p.a. would generate a return of Rs 35 lakh.
Ending note
Owing to the benefits attached to equity funds and an SIP investment, both the financial product and financial route, have become highly popular among many. This option is especially prudent for new investors looking to go beyond traditional financial options like savings accounts, fixed deposits, etc., but still want to benefit from risk-adjusted returns.