Should You Invest in Equity Funds When Stocks Are Doing Well?

Do you want to grow your money? Are you looking for returns above inflation? You may consider investing in equity funds that could give attractive returns over some time. However, should you invest directly in stocks instead of putting your money in equity funds? After the stock market recovery from the lows of the March 25 lockdown, some shares have performed exceptionally well. Should you invest in equity funds when stocks are doing well? 

If you are an aggressive investor who understands the stock market, you may put your money in stocks. However, you must invest in stocks only if you have a longer time horizon for your investment. Stocks tend to rise or fall sharply as compared to mutual funds. If you are uncomfortable with the excessive risk of investing in stocks, you may invest in equity funds. 

Equity funds put your money in shares of different companies. You may even consider investing in equity-diversified funds that are a type of equity fund. The assets of the mutual fund are invested in shares of various companies regardless of the size or sector. 

The diversified portfolio spreads the investment risk across various industries that can boost your returns over the long-run. You may consider investing in equity-diversified funds to meet your long-term financial goals, such as saving for a child’s education or buying a house. 

Also Read: Should You Invest in a Focused Fund? Get Your Answer Here

Do you have the time to monitor your stocks?

Invest in stocks only if it matches your risk tolerance. Some shares may give you a higher return over some time as compared to equity funds. However, you must pick the right stocks and also know when to buy and sell them. Otherwise, you could lose money when investing in shares. 

If you don’t have the time and the skill to invest in the best stocks, then you may put your money in equity funds. A fund manager professionally manages the fund, and a team of researchers selects the right shares. 

First-time investors may consider investing in equity funds as compared to a direct investment in stocks. Invest in the equity fund only if it matches your investment horizon and risk profile.

Invest in ELSS and save tax

The Equity Linked Saving Scheme or the ELSS is a tax-saving mutual fund that invests primarily in stocks. Your investment in the ELSS is eligible for a tax deduction up to a maximum of Rs 1.5 lakh a year under the Section 80C of the Income Tax Act, 1961. ELSS funds have a three year lock-in period which is the shortest as compared to other tax-saving investments under Section 80C.

Investing your money in the ELSS is an ideal strategy for a first-time investor in the stock market. You can save up to Rs 46,800 in taxes by investing Rs 1.5 lakh a year in the ELSS. It is the best possible investment if you fall under the higher tax brackets. Moreover, you don’t get the tax deduction under Section 80C if you invest directly in stocks.

An aggressive investor who has the time and expertise in investing in the stock market may put money in stocks. However, if you are a first-time investor in shares, you may panic if the stock markets crash. You may diversify your investment across some equity funds. It contains the volatility of the stock market to an extent, and you may get attractive returns in the long-run. In a nutshell, you must invest in equity funds or stocks based on your financial goals and risk tolerance. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in