During the last 30 years of its existence, India’s first net asset value (NAV)-driven equity funds have generated returns at a fabulous compound annual growth rate (CAGR) of 15.31%. And it is not just the mutual fund investors – people who have seriously considered investing in equities have too received the advantages of equity investment.
People are often skeptical about investing in equity instruments owing to the market volatility; and this causes them to lose out on the benefits as well. But before we get into the ‘why’ of equity investing, let us understand what they are all about.
What is Equity Investment?
An equity investment generally refers to the buying and holding of shares of stock on a stock market by individuals and firms in anticipation of income from dividends and capital gains. It basically allows an individual to assess whether equity is over or underpriced, compared with a long-term government bond.
Advantages of Equity Investment
- Diversified Portfolio
Equity funds have widespread diversification, with very small initial investment. This means buying stocks of different companies at different times in different economic sectors. This is helpful in ways that if a stock drops at the exchange the other stocks can make up for the loss.
- Capital Appreciation
This is one of the primary benefits of equity fund investments. As a company grows & earns profit, it usually chooses to reinvest the profit to grow through increasing market share, product developments, etc. With the increasing growth of the company, the market price of the stock increases, leading to capital appreciation for the investors.
One of the major advantages of equity shares is that Investing through blue chip companies, usually gives the investors a steam of regular income in the form of dividends. These companies usually pay out regular dividends in good & bad economic times, typically paid quarterly. Having a diversified portfolio will ensure a steady stream of income throughout the year. Different companies have different cycles, so investors are guaranteed a pay cheque every month.
Stocks are traded in all major exchanges in the world, every day. This makes them a highly liquid investment. This means that an investor can sell their stocks whenever they want to. One of theAdvantages of equity shares is that they are not as liquid as your savings in your bank account, but they are a close second, much more than real estate. An investor can usually get their money from a stock sale within a week.
- No brokerage or commissions
Usually fund houses charge bank fees, commission, brokerage etc., for their services which eventually reduces the profit earned by an investor. The more you pay, the less you get. One of the major benefits of equity funds is that, very often, an investor can avoid brokerage fees altogether. Over a long period of time, this becomes a major plus of investing in these types of mutual funds.
- Professional management
Investments are always surrounded by a degree of uncertainty. An investor is scared of investing due to lack of adequate knowledge & time, self-discipline, or investing experience. One of the major advantages of equity shares is that Mutual Funds fit in perfectly in this situation as they have an inherent design to tap professional expertise to manage investments, which, in turn, relive the stress of the investor.