• 3rd March 2021

Why invest in Equity Mutual Funds?

Equity funds are a type of mutual fund scheme that is managed by investing in stocks including the equity stock market. Under this scheme, a significant proportion of assets are invested in stocks of the company. Therefore, it falls in the “Stock Mutual Funds” category. 

To determine the best equity funds, you will have to evaluate the performance of the company on the investments. The evaluation can be made based on the returns every five years. Other factors like risk-return ratio and expense ratio can be also be considered while evaluating the best equity funds. Let’s have a look at the concept in detail to determine why to invest in Equity Mutual Funds.

What is an Equity Mutual Fund?

By investing in the stocks of the companies in various markets generates high returns, this is called Equity Mutual Funds. It is the riskiest kind of mutual funds and has great potential for higher returns. An investor’s returns depend on the company’s performance. At least 65% of the portfolio is invested in equity. There are several types of mutual funds such as equity mutual funds, sectoral funds, large-cap funds, mid-cap funds and small-cap funds, balanced funds, etc. that are categorized as stock mutual funds or equity funds. 

Different types of Equity Funds

The different types of equity funds come under various categories.

  1. Strategy based Investments-
  • Sectoral and theme Funds is a specific investment theme based equity fund that an investor might adopt. Some investment schemes invest in a particular sector of the market such as IT, Pharmaceutical, etc. They have a higher risk-quotient as it targets one specific sector or theme.
  • Focused Equity Fund is a fund investing in a maximum of 30 stocks of companies. 
  • Contra Equity Fund is a scheme that follows a contrarian investment strategy. 
  1. Market Capitalization based
  • Large-cap funds are investing a maximum of 80% of the assets in equity shares of companies. They are placed at the top 100 companies and are much more stable than other-focused funds.  
  • Mid-cap funds are investing in at least 65% of the total in equity shares of companies. These companies are placed at 101th-250th as per market capitalization and are more volatile than large-cap schemes. 
  • Small-cap funds are investing in at least 65% of the assets in equity shares of the companies placed at 251st and below as per market capitalization.  
  • Multi-cap funds are investing around 65% of the total assets in equity shares of varying proportions in small-cap, mid-cap, and large-cap companies.  
  • Large and mid-cap funds are investing around 35% of total assets in the equity shares of mid-cap companies and 35% in large-cap companies.  
  1. Tax-treatment based
  • Equity Linked Savings Scheme is the only equity scheme which offers up to Rs. 1.5 lakh tax benefits as per Section 80C of the Income Tax Act.
  • Non-tax saving equity funds are non-tax saving schemes. Returns are subject to capital gains tax according to this equity fund.
  1. Style-based investment
  • Active funds are schemes that are managed by fund managers. They handpick the stocks to invest in.
  • Passive funds scheme that in the general track a market segment. This market index is used to determine the stocks list which the scheme is going to invest in. there is no active role of a fund manager here.

 

Features of Equity Mutual Funds

  • Cost of Investment- The expense ratio will naturally be impacted by the frequent buying and selling of equity shares. Therefore, it has been capped by the Securities and Exchange Board of India at 2.5%. 
  • Holding Period- The taxation rate is based on the period of investment; this is known as the holding period. There are short-term gains and long-term gains. The short-term gains are taxed at 15% while the long-term gains are taxed at 10% if the gains are more than 1 lakh a year. 
  • You get great exposure by investing in a variety of stocks. Your portfolio becomes diverse and does not get concentrated. 

The best way to invest in Equity Mutual Funds

You need to invest wisely based on the performance of various companies in Equity Mutual Funds in India. In general, equity funds deliver the highest stable returns in the range of 10% to 12%. The market fluctuations and economic conditions impact the returns. To earn returns as per your expectations, you need to follow the stock market and gain quantitative and qualitative knowledge about it. 

The benefits of investing in Equity Mutual Funds:

  • Convenience.
  • Liquidity.
  • Flexibility.
  • Low-cost.

In Equity funds, you need not worry about choosing stocks as a fund manager can guide you with his expertise. An expert has full knowledge of how a particular sector is expected to perform in the future and which company you should invest in.

It is important to know how equity funds work. Equity funds invest at least 65% of their assets in different proportions across numerous companies as per their investment objective. The investment style is either value-oriented or growth-oriented. The asset allocation depends on the market condition and is in line with the investment objective. After allocation, the balance amount goes into debt and other money market instruments. This brings down the risk level and takes care of sudden redemption. The fund manager puts great efforts into making the best returns possible by deciding when to buy and sell assets according to the market condition. 

Who should invest in Equity Funds and how?

An investment plan depends on your risk profile, investment goal, and horizon. Individuals who have a long-term goal must opt for investing in equity mutual funds. This way, the fund gets a much-needed time-span to combat the market fluctuations.

A budding investor and a market-savvy investor will have different perspectives and experiences regarding investment. 

Investing in large-cap equity shares is the right choice for an aspiring investor. As the top-performing companies carry a lower risk level and deliver stable returns.

While a market-savvy investor is likely to take calculated risks by investing in diversified equity funds. They provide high returns at a lower risk. 

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