Equity Mutual Funds: Types, Benefits & Ways of Investing
Mutual funds are one of the preferred investment vehicles for retail investors. Not only do they offer high returns, they also provide tax benefits. However, the availability of different types of mutual funds often confuses investors. That said, if you are planning to invest in the shares of companies, an equity fund can be the right option.
Wondering what is an equity fund? Read on to learn about it.
What Is the Meaning of Equity Mutual Fund?
Equity Fund is a type of mutual fund scheme that primarily invests in the shares of various companies across market capitalisation. With this type of mutual fund, fund managers aim to generate higher returns by spreading investment into different company shares or stocks.
At this point, prospective investors must be thinking about how does an equity mutual fund work? Here is the answer –
Investors invest their wealth in such a mutual fund scheme via a lumpsum payment or SIP. Thereafter, this sum gets invested in an array of stocks on their behalf by the fund manager.
In addition, as per the regulations of the Securities Exchange Board of India (SEBI), equity mutual funds must invest a minimum of 65% of the corpus into equity or equity-related instruments.
What Are the Types of Equity Funds?
Types of Equity Funds
Small-cap equity funds predominantly invest in the stocks of small-cap companies. These are the companies that have a market capitalisation of less than ₹100 crore, with a ranking of or below 251. Although volatile in nature, a small-cap equity fund ensures significant returns in the long run.
This type of equity fund invests in stocks of mid-cap companies, which are listed between 101-250th according to market capitalisation. Mid-cap funds tend to offer higher returns than large-cap funds, albeit at a higher risk. Moreover, these funds are less risky as compared to small-cap funds.
In the case of large-cap funds, the investment is made in the top 100 companies as per the market capitalisation. As a result, this kind of fund generally offers sustainable and stable returns over a period of time. Additionally, large-cap funds involve lower risk than mid-cap funds, which reflects in their returns.
As the name suggests, multi-cap funds invest in various large-cap, mid-cap and small-cap companies. As they invest in enterprises across market capitalisations and sectors, they allow the benefit of portfolio diversification. Furthermore, multi-cap equity funds reduce the amount of associated risk of an investment.
Thematic Equity Funds
These equity funds invest in the securities of particular sectors, such as banking service, information technology, pharma, etc. So, their performance depends on the overall performance of the funds’ respective sector. In addition, they come with higher risks and offer higher returns.
Equity Linked Savings Scheme (ELSS)
This is a fund that primarily invests in equity or equity-related instruments while offering tax benefits to investors. Investments in ELSS qualify for deductions up to ₹1.5 lakh under section 80C of the Income Tax Act, 1961. Moreover, ELSS investments are subject to a lock-in period of 3 years.
How Do Equity Mutual Funds Work?
Equity mutual funds mandate investing 60% of its assets in equity shares of different companies. The asset allocation occurs aligning with the investment objective. Depending on the market condition, the asset allocation can be done in small cap, large cap, or mid-cap companies.
Once asset allocation is done in various equity shares, the remaining amount can go into debt or money market instruments. Keeping in mind risk level and sudden redemption request, the fund manager makes buying or selling decisions to match with the market movement and reap maximum return.
What Are the Benefits of Investing in Equity Mutual Funds?
There are several features of equity funds that can be attractive for potential investors. Discussed below are the benefits of equity mutual funds:
Professional Management- Equity funds are managed by experienced fund managers. These individuals conduct thorough market research, analyse the performance of various companies, and invest in high performing stocks that can guarantee maximum returns.
Portfolio Diversification- As mentioned earlier, equity funds enable investors to invest in various stocks. Therefore, they can effectively diversify their portfolio, which helps them spread the risk of equity investments across various instruments.
Easy Investment TooI- Investment through the Systematic Investment Plan (SIP) method enables investors to invest weekly, bi-weekly or monthly or quarterly with a minimum amount of ₹500. The low investment amount allows investors to try their hand in equity-based investments.
Returns from Equity Mutual Funds
Given their high level of associated risk, equity mutual funds offer higher returns. Over a long-term investment horizon, the average return on equity mutual funds can touch 10%-12%, if not more!
For a clearer picture of equity mutual fund returns, take a look at the table below :
Name of the Fund
Mirae Asset Tax Saver Fund
Mirae Asset Emerging Bluechip Fund
Axis Midcap Fund
Parag Parikh Flexi Cap Fund
Quant Active Fund
Quant Tax Plan
Who Should Invest in Equity Mutual Funds?
If you have a long term goal, for instance five years or more, then Equity mutual funds are the right option for you. Additionally, budding investors can find it a suitable investment option as well.
How to Invest in Equity Mutual Funds?
Investors wondering how to invest in equity funds in India can choose any of the following investment processes:
- Lumpsum Investment: In lump sum equity fund investment, investors pay the entire investment amount in a single payment.
- Investment via SIP: In Systematic Investment Planning or SIP, investors pay a small amount at regular intervals for a pre-set tenure.
Points to Consider Before Investing in Equity Mutual Funds
There are certain points that investors must consider before investing inEquity mutual fund.
Before investing in an equity mutual fund, investors must assess their requirements and the relevance of the scheme. It is the investment objective that helps to decide the level and type of return in the fund and risk associated with it.
Risk Reward Ratio
Risk Reward Ratio (RRR) is the return that investors earn against the money they have risked and invested in the market. This ratio helps to assess the maximum return an investor can receive and the maximum risk they have to take. Here, investors must align RRR with their investment risk tolerance.
Returns and Past Performance
Funds that have offered consistent annual performance or have effectively beaten the index are usually the first preferences of investors.
Investment time horizon plays a significant role in deciding the level of risk an investor is willing to take. Investors who have an investment horizon exceeding five years can find equity fund a best bet.
Expense ratio is another important factor that investors must consider. Expense ratio is a fee that every fund house levy for managing the fund. It increases the total investment cost, hence investors must have a clear knowledge on this.
Experience of Fund Manager
Having knowledge about the qualification and past performance of a fund manager is important as you will be trusting your hard-earn money with somebody else. An ideal fund manager must have a stable and reliable fund management policy and philosophy.
We hope that this article offered thorough knowledge about equity funds to prospective investors. However, bear in mind that equity mutual funds require one to have a high-risk tolerance. So, investors must evaluate their risk appetite, financial goals, and investment horizon before investing in a long-term equity fund.