The main objective behind making an investment is to earn profitable returns on it and build wealth over a long-term period. In today’s age, there are a wide variety of investment products available. For instance, there are market linked investments like mutual funds, stock, etc., or fixed return investments like bank FDs, post office deposits, etc.
A mutual fund stands for a pool of shared investments from multiple investors. The collected funds are invested in shares of listed companies or in government bonds. They can also combine securities of assets or short-term money market instruments. By investing in mutual funds, an investor can grow a portfolio of stocks, bonds, or securities. The fund managers manage mutual funds on a day-to-day basis.
The most popular scheme of mutual funds is the Equity mutual fund. No other investment option offers returns as much as equity mutual funds do. As per current SEBI mutual fund regulation, an equity mutual fund scheme must invest at least 65% of the scheme’s assets in equity-related instruments.
Key Takeaways
- A fund manager is responsible for mutual fund investment management.
- An equity fund is a mutual fund scheme that invests mainly in equity stocks.
- You can invest your money in a mutual fund via SIP or lump sum, which is then invested in various equity stocks on your behalf.
- You can receive more returns by investing in an equity mutual fund compared to other mutual fund schemes.
- The size of an equity mutual fund is determined by market capitalization.
What Exactly Is An Equity Mutual Fund?
An equity mutual fund invests widely in the stocks of various companies to generate good returns. Equity fund investments are linked to higher risk as compared to the other types of mutual funds. Hence, they have the potential to provide higher returns than other schemes. The company’s performance plays a significant role in deciding the return on the investment.
An Equity mutual fund is an excellent option for investors for capital appreciation as they have the potential for long-term wealth creation. Investors looking to invest for the long term and who want to gain exposure to the stock market can choose to invest in an equity fund.
How Do Equity Funds Work?
An Equal mutual fund invests a significant corpus in equity shares of different companies in particular proportions. This asset allocation is based on the types of an equity fund and their alignment with the objective of an investor. Depending on market conditions, the asset allocation can be made purely in stocks of small, mid, and large-cap companies.
After allocating a significant portion towards the equity segment, the remaining fund may go into debt and money market instruments. The fund manager is responsible for buying or selling decisions so you can take advantage of the changing market movement and get maximum returns.
Types Of Equity Mutual Funds
After understanding what an equity mutual fund is, now let’s talk about its different types of it. An equity mutual fund can be categorized by the investment sectors and based on asset allocation.
Based On The Investment Sectors
Equity funds that focus on a particular sector or theme fall under this category. The sector funds get invested in a specific industry like pharma, technology, and many others. As sector funds focus on a particular sector or theme, they tend to be riskier. This is because of their performance is based on the market risks. However, industry funds can be diversified in terms of market capitalization.
- Small-cap Equity Funds: This equity fund scheme invests in companies that rank above 250 in terms of their market capitalization based on the SEBI guideline. Small-cap equity funds are risker than other schemes, but it offers relatively higher returns.
- Medium-cap Equity Funds: These funds invest in medium-sized companies that rank 101 to 250 by their market capitalization. It is less risky than small-cap equity funds. The minimum exposure to such stocks is 65% of the total assets.
- Large- cap Equity Funds: These funds invest in well-established companies that rank between 1 to 100 in market capitalization. It is considered to be the least risky as far as equity fund-picking goes. The minimum exposure of large-cap equity funds is 85% of total assets.
- Multi-Cap Equity Funds: Multi-cap funds are invested in stocks across all market capitalizations. The fund managers decide to invest predominantly in a particular capitalization depending on the market conditions.
Base On The Asset Allocation
There are some funds that split the portfolio allocation between predominantly equity and the rest in debt or other equities. It is crucial to look at the asset allocation from a tax efficiency perspective as per the provisions of the Income Tax Act, 1961. The equity funds like international equity, which have a leading foreign equity allocation, are classified as debt funds for income tax purposes.
Equity Linked Savings Scheme (ELSS)
Equity linked savings scheme (ELSS) funds are tax saving mutual fund investment schemes that invest majorly in equity and equity-related schemes. Under the ELSS scheme, the investment corpus is invested mainly in equity and the rest in debt-related securities. Individuals can claim up to INR 46,000 annually by investing in equity-linked savings schemes.
Did You Know?
The Indian mutual fund industry’s AUM has grown to INR 37,57,000 crore as of March 31, 2022.
Source: https://www.amfiindia.com/indian-mutual
The Pros Of Investing in Equity Funds
There are several advantages of investing in an equity mutual fund. Here are the most beneficial pros of it.
Managed By Experts
Equity funds are professionally managed by fund managers who constantly track the market performance to have better investment opportunities. This makes investments in equity funds the best option for investors who want to gain exposure to the equity market.
Provides Tax Benefits
You can get tax benefits up to INR 150,000 under Section 80C of the Income Tax Act by investing in ELSS (Equity Linked Savings Scheme). It has a lock-in period of 3 years which is currently one of the shortest tax-saving instruments.
Grow Wealth Over a Long-term period
Equity funds have the potential to generate better inflation-adjusted returns compared to traditional investment avenues. Equity funds provide opportunities to grow investors’ capital over the long-term period.
Convenience
Investors can start a SIP (Systematically Investment Plan) and STP (Systematically Transfer Plan), which makes it easier for investors to invest, redeem or transfer their units to another scheme very quickly.
Start With a Small Amount
Investment in an equity mutual fund is cost-effective as AMCs (Asset Management Companies) put a small amount ranging between 0.5% to 1.5% as the expense ratio on the investors. The expense ratio should be under 2.5%, as guided by the SEBI (Securities And Exchange Board Of India).
High Liquidity
An investor can redeem the units of an equity fund at any time on any business day at the applicable NAVs. This offers liquidity to every investor. However, an investor cannot liquidate in ELSS funds unless the lock-in period is over.
Word To Remember
ELSS – Equity Linked Savings Scheme
It is known as a tax-saving mutual fund scheme. The fund invested in this scheme is mainly invested in equity and other debt-related securities. An investor can claim a reasonable amount of funds annually by investing in ELSS funds.
Conclusion
In simple words, an equity mutual fund pools your money and invests it in equity stocks after in-depth research. However, it is essential to know what is equity mutual funds and the basics of how an equity fund works. This includes understanding the objective of the equity fund and mapping it to your risk profile. You must also know the expense ratio of the fund as it could impact returns.
FAQs
Debt funds bring stability to the portfolio and they are considered dependable investment channel.
Equity funds give inflation beating returns and these funds come with a higher risk of being subject to market fluctuation.
Focused equity fund is an equity fund that invest 65% of the total assets in equities and equity-related instruments. It can be invested across market capitalizations and sectors.
An investor looking to create long term capital appreciation can look to invest in equity funds. The choice of the scheme should depend on the risk appetite and investment objective.
Equity funds invest primarily in stocks of companies whereas the debt funds are invested in fixed income securities such as bonds, government securities and other debt instruments.