Imagine a farmer who nurtures his land and crops to earn returns in the form of thriving produce. And the smartest farmers step out of their comfort zone, investing in new technology, different crops and seeds as well, to keep earning higher returns.
Similarly, when you invest in a ULIP Plan and choose an equity-oriented fund, an insurance company uses their expertise to make smart investments in the stock market on your behalf. Thus, you will get the insurance cover along with the benefit of earning higher returns by investing in equity, debt, or a mix of both.
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Equity investment refers to the process of buying shares (or ‘stock’) of a company, which makes you a part-owner. Your returns come from an increase in the share price that increases the value of the stocks that you own. You may also earn some gains from the dividends paid by the company.
Common types of equity investments include direct stock investment, equity mutual funds (which pool money to buy shares), and Unit-Linked Insurance Plans (ULIPs) that have an equity fund option.
You can start by opening a demat account for direct stock trading or investing through a mutual fund platform. For a simpler investment plan, you can choose a ULIP that offers equity funds.
The main risk is the unpredictability of markets. For example, share prices can go down, and you could lose your principal capital. In an equity investment, returns are not guaranteed. Hence, it is important to make equity investments after researching well and proceeding with caution.
You can lower risk by diversifying your investments across different companies and sectors. Investing for the long term and using Systematic Investment Plans (SIPs) can also help average out the cost of purchase. It can help reduce the impact of market unpredictability to some extent.
The key advantages of an equity market are the potential for high returns (which can beat inflation over the long run) and the ease of buying and selling shares. You also get to move your money around without many restrictions.
In India, if you sell stocks or equity mutual funds after holding them for more than 12 months, the profit is taxed as Long-Term Capital Gains (LTCG) at 12.5% (without indexation). If sold within 12 months, it is taxed at 20%.
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