If you are looking for ways to grow wealth by investing but are unsure where to start, equity mutual funds are the way to go. An equity mutual fund is a fund that invests primarily in stocks. Thus, they are also called stock funds. Understanding what is equity fund is crucial for those who want to participate in the rally of the equity markets but are wary about direct stock purchases.
However, while understanding equity investment meaning, investors often misinterpret various categories of equity mutual funds. They often have questions in their minds, such as what equity funds are, what types of equity funds exist, what their benefits are, and what the difference between equity and mutual funds is. If you want to make a wise decision about your investment, here is all about what is equity fund and its different aspects.
What Is an Equity Fund?
To understand equity funds, it is essential to know that they are mutual funds that primarily invest in stocks. According to the latest SEBI Mutual Fund Regulations, an equity fund scheme must invest at least 65% of its assets in stocks and securities related to the securities market. Equity funds can be managed actively or passively. Passively managed funds follow a particular index.
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Equity funds are mainly mutual fund schemes designed for investment in public trading companies. Their primary goal is to generate long-term appreciation across industries. These funds could offer various investments, including target-specific investments. Specific managers manage these funds, which are targeted toward stock selection and portfolio balancing. These funds are targeted toward structural investment in the stock market and managing monetary returns.
Types of Equity Funds
Knowing what is equity fund also involves understanding the various types available for investment:
1. Large-cap Equity Funds
Large-cap equity funds are the top companies listed in stock, the top 100 big companies. These are mainly based on market capitalisation and listing in the stock market. These companies prevent market volatility and resilience.
2. Mid-cap Equity Funds
Mid-cap equity funds are held by companies in the top 101 to 250th positions. Based on market capitalisation, they can provide moderate or high returns. However, these funds have comparatively higher risk.
3. Small-cap Equity Funds
These funds rank among the 251 to 500 top companies in the market. They have a higher risk but can bear returns for a longer time.
4. Multi-cap Equity Funds
Multi-cap equity funds have diversified funds and invest across market diversification. Since they have diversification in the market cap investment, they can balance the ratio of risk to return.
5. Sectoral Equity Funds
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Sectoral equity funds are investments in funds in a specific segment, such as IT or pharmaceuticals. Returns are closely related to the performance in these specific segments.
6. Thematic Equity Funds
They are invested in stocks of companies with a particular theme, such as clean energy, digital technology, or something else. They carry a higher investment risk as they focus on a specific theme. They might follow ups and downs in terms of investment returns.
7. Index Equity Funds
These are aimed at multiplying the performance of a specific stock market index, such as the Nifty 50, the S&P BSE index, or others.
Perks of Investing in Equity Funds
Understanding what is equity fund also highlights the benefits these funds offer over other investment options:
- Equity funds diversify your investments across multiple sectors, minimising sector-specific risks and providing balanced returns, regardless of the performance of any single industry.
- The fund managers managing the fund hold experience to generate superior returns.
- Equity mutual funds are highly transparent investments. AMCs disclose the returns of underlying securities in their monthly fact sheets.
- SEBI regulates mutual funds in equity; its primary role is to protect investors’ interests. This oversight makes mutual fund investments relatively safer.
- Open-ended mutual fund schemes offer high liquidity. Units of open-ended schemes can be redeemed by sending a redemption request to the asset management company.
Things to Know Before Investing in an Equity Mutual Fund
When exploring what is equity fund, it is essential to know the associated risks and considerations:
- Investing in every equity mutual fund involves risks. So, before investing, it is mandatory to check the risk factor of the mutual fund’s scheme.
- Direct investment in mutual funds will yield better results. In the case of direct plans, no agent is involved in the process, and no commission plans are applied. Lower annual costs are required to pay for the investments.
- Equity mutual fund investments will never give you a standard return every year. Suppose you get a 5% return at the end of the first year; you might get even 3% at the end of the second year. There can be times when there are no returns at all. So you have to be prepared for this situation.
- Consistency of return is essential in selecting the best equity mutual funds for investment. Suppose a particular fund gives you a 17% return in the first year; the same might give 10% in the following year. Hence, choosing a scheme with a stable return is significant.
- Allocating assets is essential. You must not put all your eggs in different baskets. Similarly, choosing your schemes from the same sector might land you at risk and bear lesser returns.
Conclusion
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Equity mutual fund schemes offer a smart way to invest in the stock market. By understanding what an equity fund is and how it differs in the equity fund vs mutual fund comparison, investors can leverage expert management and diversified portfolios to achieve their financial goals. Remember, selecting the right fund is key to a successful investment strategy that can withstand market fluctuations.
FAQs
1. How do Equity Funds provide diversification?
Equity funds offer diversification through their broad selection of stocks from many businesses and sectors. Funds lessen the negative effects of a single stock’s bad performance on the portfolio by distributing assets among several companies.
Because of this diversification, investment in individual equities has less unsystematic risk because a single firm’s performance has a smaller impact on the fund as a whole.
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2. How do you get Mutual Fund returns?
The online mutual fund returns calculator can be used to determine mutual fund returns. It provides you with the percentage of returns on capital that was invested.
3. Can I withdraw mutual funds anytime?
Yes, unless your investments are in the Equity Linked Savings Scheme (ELSS), where the lock-in period is three years from the date of investment, you are free to withdraw your mutual fund investments at any time before the maturity term.
4. Is equity better than FD?
Since stocks have a large potential return, they are a good choice for long-term growth goals. Conversely, FDs are the low-risk investments since they guarantee returns and stability.
5. What is the minimum period for mutual funds?
There isn’t a set minimum tenure required to invest in mutual funds. As a result, one can invest in mutual funds for a single day or all time. However, there is a three-year minimum lock-in period for the Equity Linked Savings Scheme (ELSS).
References:
https://fi.money/guides/mutual-funds/the-beginners-guide-to-equity-mutual-funds-what-they-are-and-how-they-work
https://www.investopedia.com/terms/e/equityfund.asp#toc-types-of-equity-funds
https://www.bankrate.com/investing/guide-to-mutual-funds/
