Equity-oriented mutual funds are widely popular among investors for the high return potential it offers to investors. However, along with high return potential, these funds are often accompanied with high risk possibility as well. As a result, these funds have high risk-return factor. This makes investors wonder if they are ideal for long-term investment goals. In this article, we will try to explore the same. Let’s begin with what are equity funds.
What are equity funds?
Equity funds are a type of mutual funds that invest majority of their assets in equities and equity-related securities. As per Indian mutual funds’ regulator – SEBI (Securities and Exchange Board of India), equity funds are mandated to allot a minimum of 65% of their assets to equities. As the volatility associated with equity funds tend to settle over time, equity funds are suitable for long-term goals. Here are a few factors that make equity-oriented funds ideal for long-term investment goals.
Equity funds help to earn inflation-earning returns
Most investors invest in different investment options with the hope of growing their capital at a quicker pace than the prevalent inflation rate. Inflation refers to the decline of purchasing power parity of a particular currency over time. In simple terms, it refers to the upsurge in the price of the general level of services and the goods. When an investment is unable to generate higher returns than the rate of inflation, the investor eventually loses money (even though the investment has provided positive returns). Equity funds have historically offered investors with inflation-beating returns over a prolonged duration.
Taxation benefits of investing in equity funds
Another factor that makes equity funds ideal for long term goals is the taxation benefits it provides to investors.
| Type of mutual fund | Short-term | Short-term capital tax (STCG) | Long-term | Long-term capital tax (LTCG) |
| Debt fund | Investments held for a period of less than 3 years | 20% on capital appreciation with the added benefits of indexation* | Investments held for a period of more than 3 years | As per the income tax bracket of the investor |
| Equity fund | Investments held for a period of less than 12 months | 15% on capital appreciation | Investments held for a period of more than 12 months | 10% on capital appreciation for capital gains above Rs 1 lac** |
Long term capital gains (LTCG) tax on equity funds is taxed at merely 10% for capital gains exceeding Rs 1 lac per annum. Where as, short-term capital gains (STCG) tax on equity funds is taxed at 15% per annum. In the case of debt funds, LTCG tax is taxed according to the income tax bracket of the investor, which can be more than 10% (it would be more than 10% if your annual income exceeds more than Rs 7.5 lac). Moreover, for debt funds to be classified under long term investments, you must be invested for a minimum duration of three years. On the other hand, equity funds just require an investor to be investor for at least 1 year to enjoy tax benefits of long-term investments.
Apart from this, an investor can enjoy tax benefits of up to Rs 1.5 lac per annum if they invest in ELSS funds. ELSS funds offer tax deduction of up to Rs 1.5 lac under Section 80C of the Income Tax Act, 1961. An investor can successfully save up to Rs 46,800 by investing in tax-saving investments such as ELSS tax saver mutual funds provided that they belong to the highest tax slab. What are you waiting for? Build a healthy mix of investment portfolio with equity funds and stay invested for a long duration to enjoy long term benefits of equity funds. Happy investing!
*Indexation is a way that includes factoring inflation from the time of procurement to the sale of units. This helps in regulating the tax components of an investor.
**LTCG on equity funds up to Rs 1 lac are exempt from any tax
