Equity funds invest primarily in equity shares of listed companies across different sectors and market capitalization segments. Equity funds are considered as one of the long term investment products and ideal if you are planning to invest for the long term in order to achieve your financial goals like, retirement, higher education of your children or wealth creation. Let us see the benefits of investing in equity funds.
• Equity is one of the best performing asset class in the long term: Historical data shows that, equity is the best performing asset class if your investment horizon is long. In the last 20 years, the BSE Sensex has given 11.94%, while gold has given 10.32% and bank fixed deposits have given 7.01% annualized returns respectively. (Source: BSE India, World Gold Council and leading bank FD rates, for period ending 23/1/2018)
Rs 1 lakh invested in the Sensex 20 years back would have grown to Rs 9.62 lakhs, while the same amount invested in gold and fixed deposit would have grown to Rs 7.10 lakhs and Rs 3.89 lakhs respectively. (Source: BSE India, World Gold Council and leading bank FD rates, for period ending 23/1/2018)
• Diversification of risk: By investing in an equity fund which has a diversified portfolio of stocks across different sectors, you are able to diversify company specific risks and sector risks to a greater extent. Whereas when you invest directly in stocks, you are exposed to company and sector risk along with the market risk as well. Also, significant investment is required to build a diversified portfolio of stocks if you are investing directly. As mutual funds work on the concept of pooling of money from many investors, you can aim to achieve risk diversification even with a small investment.
• Professional fund management: Equity funds are helmed by fund manager(s) supported by a team of analysts. The track record of the scheme managed by the fund manager is available in the public domain. As investor, you can leverage the experience and expertise of the fund management team to get better returns on your investments. As stock selection is a complex task which requires careful analysis of different factors like capital structure, financial performance, financial risks, competition, industry growth factors etc. Asset Management Companies employ team of research analysts and the fund manager/s who have the necessary experience and expertise to analyse these complex factors.
• Systematic Investing helps create big corpus: You can invest in Equity funds through systematic investment plans (SIP) which offers a convenient mechanism of saving small amounts every month on a specific day. The money is automatically debited from your bank account every month on the specified date chosen by you and invested in a mutual scheme of your choice. Over a period of time one can accumulate a fairly large corpus.
Tax Advantage: Finance Bill, 2018 introduced long term capital gain tax on long term equity oriented fund (Investments held for more than 12 months)
at concessional rate of 10% on over and above of long term capital gain Rs. 1,00,000 w.e.f. 01.04.2018.
The long term capital gains will be computed without giving effect to the first and second provisos to section 48, i.e. inflation indexation in respect of cost of acquisitions and cost of improvement, if any, and the benefit of computation of capital gains in foreign currency in the case of a non-resident, will not be allowed.
ii) The cost of acquisitions in respect of the long term capital asset acquired by the assesse before the 1st day of February, 2018, shall be deemed to be the higher of –
a) The actual cost of acquisition of such asset; and
b) The lower of –
(I) the fair market value of such asset; and
(II) The full value of consideration received or accruing as a result of the transfer of the capital asset.
Fair market value has been defined to mean –
a) In a case where the capital asset is listed on any recognized stock exchange, the highest price of the capital asset quoted on such exchange on the 31st day of January, 2018. However, where there is no trading in such asset on such exchange on the 31st day of January, 2018 , the highest price of such asset on such exchange on a date immediately preceding the 31st day of January, 2018 when such asset was traded on such exchange shall be the fair market value; and
b) In a case where the capital asset is a unit and is not listed on recognized stock exchange, the net asset value of such asset as on the 31st day of January, 2018.
• Short term (investments held for less than 12 months) capital gains are taxed at 15%.
• Finance Bill, 2018 introduced dividend distribution tax @10%(Grossed up basis) plus surcharge and education cess as applicable on dividend distribution by EOF w.e.f. 01.04.2018 and such dividends are exempted in the hands of investor
It should be noted that the analysis, opinions, views expressed in the document pertaining to taxation are based on the Budget proposals presented by the Honourable Finance Minister in the Parliament on February 1, 2018 and the said Budget proposals may change or may be different at the time the Budget is passed by the Parliament and notified by the Government. For a detailed study, please refer to the budget documents available on
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