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What are Equity Investment and Benefits of it?
The term equity has different meanings, depending on the assets and the context. Generally, equity refers to the ratio of your ownership of an asset after paying off all debts associated with that particular asset. For example, buying the shares of a company is an equity investment.
Published on 21 March 2022
Mutual funds are a popular investment tool for many reasons, including their ability to generate attractive returns compared to other traditional investments. But, if you are focusing on returns, equity funds, which are a type of mutual funds, ace the list. Equity funds can generate the highest returns, and therefore, many investors are eager to invest in this category of mutual funds.
In the sections that follow, let us understand what is equity and what are the advantages of equity investment.
What is Equity?
Equity is an asset class that offers great potential in maximising returns. This category of mutual funds invests in the shares or stocks of a company.Thus, they are also known as stock funds. The purpose of equity investment is to generate capital appreciation. Hence, they are sometimes referred to as growth funds.
Equity fund investments are associated with a higher risk than other investment funds. Besides, there is no one-size-fits-all. Based on investment objectives, equity funds are classified into different types. Therefore, an investor must map the objectives and the types of equity funds with their risk profile before investing.
Benefits of Equity Investment
1. Ownership
When you invest in the shares of a company, you become a shareholder. Consequently, you can exercise control. As an investor, you enjoy a share of the income earned by the company and also get voting rights.
2. Higher returns
Equity investment helps in generating high returns in a short time. If you pick stocks appropriately and devise a solid trading strategy, you can probably earn unparalleled returns from the stock market going forward.
3. Capital gain, income, and dividend
The returns from investing in equity are not just one, but two. These include capital appreciation and dividend income. When a company’s share price increases or it earns a profit, you receive a return on investment in the form of a dividend. Essentially, a dividend is an additional income to the investor.
4. Stock split
Some companies split their stocks into parts. While the company’s share price reduces, with an equity investment, your capital holding remains the same. Moreover, the liquidity of the share increases.
5. Liquidity
Investments in the share market offer high liquidity. It means that you can easily transfer shares to another owner. This is not the case with other investments like real estate.
6. Flexibility
A new investor can enter the stock market with a rather small investment in equity funds. A good way to start would be by purchasing the stocks of small-cap or mid-cap companies in smaller units. Moreover, equity gives you the freedom to buy or sell shares anytime and hold for as long as you desire.
7. Tax benefits
Your equity investments are tax-efficient. The long-term capital gains (LTCG) you earn from equity investments are not taxable for up to ₹1 lakh. LTCG more than ₹1 lakh is taxed at 10%. The taxation rate for short-term capital gains from equity funds is 15%.
Also Read: How are gains from Intraday Trading Taxed?.
How are Equity Shares Taxed?
Investing in equity is risk-prone. However, they also generate high returns if traded properly. Also, no matter how much profit you will incur through investing in equities, the returns will always be subjected to taxation rules. If the investment tenure is less than a year, the short-term capital tax gains rule would be applicable. For the tenure that more than a year, the long-term tax gains rule will be applied.
Let’s understand how equity shares are taxed with a simple example.
If a trader is salaried and has invested in share trading in FY2019-20, and if his yearly salary is ₹8,70,000, he may incur a short-term capital loss of ₹30,000 and a long-term capital gain of ₹2,50,000.
In that case, the investor needs to file ITR-2 for FY2019-19, and then his tax liability and his total income would be calculated as –
|
Particulars |
Amount |
Amount |
|
Salary |
|
₹870000 |
|
Capital Gains |
|
|
|
LTCG |
₹250000 |
|
|
STCG |
₹30000 |
|
|
Exemption u/s 112A |
₹100000 |
|
|
Taxable LTCG |
₹150000 |
|
|
Overall Capital Gains after set-off of losses (taxed @10%) |
₹120000 |
|
|
Taxable Income |
|
₹990000 |
|
Tax at Special Rate |
₹12000 |
|
|
Tax at Slab Rate |
₹86500 |
|
|
Total Income Tax |
|
₹98500 |
|
Health and Education Concession at 4% |
|
₹3940 |
|
Total Tax Liability |
|
₹102440 |
Hence, before you make an investment in equities, follow this above-mentioned example to understand how equity shares are taxed.
How Can You Invest Efficiently and Safely in Equity?
When investing in equities in the share market, there are three things that you need to consider in order to invest safely and efficiently –
1. Your Investment Objective
First and foremost, you need to identify your investment objective and goal before investing. This objective is different for every investor. Hence, you must choose equities for investing keeping in mind your financial goals. Also, you need to decide on your investment horizon before investing.
2. Risk-bearing Capacity
This is a very crucial thing to consider when investing in equities. You need to be aware of your risk-bearing capability before investing. If you have a low-risk appetite, you may consider investing less in the beginning. This way, your investment will be less impacteded by the market volatility.
3. Diversification of Portfolio
When you are able to build a diversified portfolio, you will be able to mitigate your risks. Simply put, the more diversified your investments are across different sectors, there will be lower financial risks with your investments.
Wrapping Up
Equity investment refers to buying and holding the share of a company. The investment comes with a wide scope of benefits, such as capital gains, high liquidity, limited liability, control, tax efficiency, etc. To make a wise decision of investing in equity funds, make sure you research well and diversify your portfolio. Since prices fluctuate with market volatility, remember to make smart decisions about when to buy and sell.
