Don't be afraid of the stock market

When stock markets peak as they have in recent months, many first-time investors get drawn to them. They had stayed away so far. But recent returns have whetted their appetite. They want to come in. In 2017-18, Indians have invested Rs 8 lakh crore in stocks, and only Rs 3.4 lakh crore in fixed deposits. But does a beginner know which stocks to buy, hold and sell? To help them, we have equity mutual funds which any investor can start buying with sums as small as Rs 500 a month. Let’s take a look at the advantages of equity investing via mutual funds — and how you can create tax-free wealth through them.

DIVERSIFICATION
A typical equity fund invests in a collection of companies with profit-generating potential. These companies are in various sectors and of market capitalisation levels. For example, a well-known equity fund invests over 80 per cent of its corpus in large cap companies, which would be the cream of Indian corporates. It puts over 17 per cent in financial services companies, 15 per cent in technology, 12 per cent in energy, and so on. This ensures that your money is invested in a wide array of profitable companies across multiple sectors, making sure your portfolio is diversified. If one sector falls, there are others to prop up your returns.

GET HIGH RETURNS
In the last 12 months, several equity funds have provided returns of 30-50 per cent. While the going’s not always this great, equity mutual funds have outperformed most other forms of investment in the recent long term. As per the Crisil-AMFI Equity Fund Performance Index for September 2017, investors have reaped a CAGR of 10.45 per cent over 10 years, 16.58 per cent over five, and 15.31 per cent over one year. This is easily better than returns from PPF, fixed deposits, and even gold. Being invested in a well-managed equity fund for the long-term also helps investors tide over periodic market crashes. Rs 10,000 invested monthly in an equity fund generating a CAGR of 12 per cent for 15 years will give you a corpus of Rs 50.5 lakh. The same amount invested in PPF for 15 years would give you Rs 34.2 lakh. The same amount invested in a recurring deposit at seven per cent while you are in the 30 per cent tax bracket would give you Rs 26.6 lakh.

LET FUND MANAGER DECIDE
An equity fund is a collection of stocks bought collectively by investors. The decision-making of what to buy, hold, and sell — and when — rests with the fund manager. For his financial expertise, the fund manager charges an expense ratio, deducted from your fund during liquidation.

TAX EFFICIENT
The greatest thing about equity investment isn’t that you can earn handsome returns. It is that those returns are tax-free after one year. Returns from equity investments held for one year or more qualify as long-term capital gains. Those 30-50 per cent returns we spoke of above? They are tax-free! A higher tax efficiency helps you complete your wealth creation goals faster. Compare this with a tax-inefficient instrument such as a fixed deposit. If you are in the 30 per cent bracket and creating a seven per cent fixed deposit, your actual returns may be just 4.9 per cent.

COST AVERAGING VIA SIPS
Invest in equity mutual funds through Systematic Investment Plans (SIPs). This ensures you have a healthy cost averaging, and therefore better chances of earning profits after a market fall. While markets fall, an SIP helps you buy your mutual fund at a lower cost. When the markets rise again, your path to profitability is shorter. With SIPs, you can start investing with as little as Rs 500 a month — often less than the value of a stock.

EASY TO LIQUIDATE
Equity funds should be selected ideally for long-term money goals, such as the creation of wealth for retirement. That said, mutual funds are very easy to exit at any point. Just take care of the exit load which is charged, typically at one per cent for investments held for 365 days of less. Barring tax-saving mutual funds, equity funds don't have lock-ins, which means you can enter and exit them at your convenience.

Adhil Shetty is CEO, BankBazaar.com