Equity funds are mutual funds that invest largely in stocks/shares of a company. You put money into the fund by SIP or lump payment, and it invests it in a variety of equity stocks on your behalf. The resulting gains or losses in the portfolio have an impact on the Net Asset Value (NAV) of your fund. Of course, there are nuances to consider, but this is the heart of investing in equities mutual fund schemes. However, being a responsible long-term investor might help you learn more about how equity mutual funds work. Let us examine them closely.
What is an Equity Fund?
So, what is equity fund? Mutual funds invest in various asset types based on the scheme’s requirements. Mutual funds can be categorised according to the assets they invest in, such as indexes, commodities, equity-oriented funds, and debt-oriented funds. Let’s examine equity funds in more depth.
A mutual fund scheme known as an equity fund allocates most of its assets to equities of the acompanies listed on the market. Mutual funds that invest at least 65% of their assets in equities in different proportions are categorised as equity fund allocatesby SEBI. The residual funds may be used to purchase debt, gold, or cash.
How Do Equity Funds Work?
A significant corpus of equity mutual funds is invested in specific ratios of equity shares of different corporations. The type of equity fund and its alignment with the investment goal determine this asset allocation. The asset allocation may consist entirely of small–, mid-, or large-cap stocks, depending on the state of the market. The remaining funds are invested in debt, and other money market instruments after a sizeable part is allocated to the equities section. This reduces the element of risk and handles impromptu redemption requests.
The features of equity funds are:
- Equity funds, as implied by their name, predominantly allocate a significant portion of their fund corpus to investments in stocks. These funds venture into shares of companies across various sizes, with their primary objective being capital appreciation.
- Investors with a goal of wealth creation may find equity funds appealing. Typically, these funds present more lucrative returns than hybrid or debt funds and traditional bank deposits.
- Individuals with a high tolerance for risk-seeking substantial returns may consider investing in equity funds. However, if you prefer secure returns, even at lower interest rates, this fund may not align with your investment strategy.
- Equity funds are particularly well-suited for long-term investments, spanning five years or more. Given the gradual fluctuation and ascent of stock prices over time, equity funds require a longer horizon to yield substantial returns.
Who Should Invest in Equity Funds?
The alignment of your choice to invest in equity funds should match your risk tolerance, investment timeline, and financial goals. Opting for equity funds is typically advisable if you have a long tenure, such as five years or more. This extended period allows the fund ample time to navigate and withstand market fluctuations.
For Budding Investors
If you’re a prospective investor seeking exposure to the stock market, opting for large-cap equity funds could be the appropriate decision. These funds allocate investments to the equity shares of high-performing companies characterised by lower risk. Historically, these well-established companies have consistently provided stable returns over an extended duration.
For Market-Savvy Investors
If you understand market dynamics well and are open to taking measured risks, considering investment in diversified equity funds might be a prudent choice. These funds allocate investments across companies of varying market capitalisations, offering a compelling blend of high returns with lower risk when compared to funds exclusively focused on small-cap or mid-cap investments.
Benefits of Equity Mutual Funds
- High returns: Returns from equity mutual funds are typically elevated, but they come hand in hand with higher risks. Nonetheless, one effective strategy to address the risks inherent in equity investments is maintaining a long-term investment horizon.
- Liquidity: Except for ELSS (Equity Linked Savings Scheme), all open-ended equity mutual funds permit you to redeem your funds at any point.
- Diversification: Numerous mutual funds are available for you to consider, enabling the creation of a diversified portfolio. Diversification stands out as an effective strategy for reducing investment risks.
- Tax benefit: ELSS, categorised as an equity mutual fund, allows you to lower your taxable income and save on taxes. Strategic planning of your investment tenure can also contribute to tax savings.
Investing in equity mutual funds is unquestionably less risky than direct participation in the stock markets and offers many advantages. When engaging in equity funds, the objective should be to invest over an extended period systematically. Allocate your investments in equities with a focus on meeting long-term financial objectives, choosing funds wisely to add stability to your portfolio.