Equity funds are popular among investors for their growth potential. By investing in a basket of stocks, equity funds have the ability to grow your money substantially if the market conditions are favourable. However, it is important to understand that equity funds also come with a higher level of risk compared to other investment options.
During bear markets, the value of your equity fund investment may decrease, and the degree of your loss will depend on the composition of your portfolio. To counter some of this volatility, you may choose to invest in equity funds for a longer term. This helps to average out market fluctuations and provides a longer time horizon for equity investments to grow. Read on to find out more about how equity fund investing can become a safer option when investing for a longer time period.
What are equity funds?
When you invest in equity funds, you are essentially investing in a collection of stocks from different companies. Stocks are known to be one of the assets with the largest growth potentialand investing in equity funds allows you to take advantage of this.
Depending on the type of fund, an equity fund can contain up to 90% of stocks. There are different types of equity funds to choose from, such as large-cap, small-cap, and mid-cap funds. Each type of mutual fund invests in a different set of stocks, so it’s important to understand your investment goals and risk tolerance before choosing the right equity fund for you.
What is considered longterm?
When it comes to investing, the definition of long term can vary from person to person. However, when it comes to equities, a time horizon of five years or more is generally considered safe. By investing in equities for the longer term, you give your investments the time they need to grow and reach their full potential. Additionally, investing in equities for a longer period can also result in lower taxes on returns, which can help increase your overall returns.
Why is investing in equity funds for the longer term beneficial?
Investing in equities for the long term has several benefits that help to minimise the risk associated with investing in them. The historical growth trend of equities supports the idea that over a longtime frame, equities have shown significant growth. Although there may be short-term dips in the stock market, they are typically offset by overall market ups. By investing in equity funds for a longer period, you can take advantage of this trend and potentially reap the rewards of long-term growth.
Additionally, long-term investing in equities can also lead to a lower tax on returns, making it a smart investment strategy. As per income tax laws, short-term capital gains from equity investments, defined as gains realised within 36 months, are taxed at a rate of 15%. However, if the investment is held for a longer period of time, i.e., more than 36 months, the returns are considered longterm and are tax-free up to a limit of Rs 1 lakh. Any returns exceeding this limit will be taxed at a reduced rate of 10%. This tax benefit makes long-term investing in equities more attractive.
Investing in equity funds for a long-term time horizon can be a safe bet due to the historical growth trend of equities and the potential to reap the rewards of long-term growth. By investing for the longer term, market fluctuations can be averaged out, and the potential for tax benefits on returns can be increased.