Equity mutual funds have seen huge inflows in the last three years, which largely reinforces the faith Indian investors have in equity markets. While equities and equity funds are high on the risk scale, they offer the best wealth creation over the long term. Here are seven key reasons to invest in equities and equity funds.
Entry barrier is very low: Today you can open a demat account and even buy one share of any company of your choice. You can start investing in equity mutual funds with as low as Rs 500. As a result there are virtually no entry barriers for investing in equity and equity funds.
Equity and equity funds are very liquid: Let us offer a clarification here. The price risk in equities still exists. But, the current market liquidity allows you to redeem and realise the proceeds in 2-3 days. Of course, liquidity may be an issue in certain micro-cap stocks, but generally it is liquid.
You can participate in the India growth story: That is the big advantage of investing in equity funds in India. The Indian economy is growing at nearly 7% and it is the fastest growing large economy along with China. Buying equities and equity funds in India is like participating in the big consumer and investment potential of India.
Your best hedge against inflation: This is a major merit of investing in equities. Over the long run, equities and equity funds give the best protection against inflation. A bank FD will yield less than 8%, which can be inadequate with inflation at around 4%. Equity funds offer a much better protection against inflation over the long term.
Equity and equity funds are very tax efficient: In fact, they are tax efficient in a variety of ways. The dividends are entirely exempt in the hands of investors in case of equity funds. Long term gains for equity held beyond one year are tax-free. Short-term gains are taxed at a concessional rate. Above all, you have the added benefit of tax rebates in ELSS funds.
When you are looking at long-term goals, it is much easier to leverage the power of equities as compounding works in your favour.