What Is An Equity Fund?

When 60% or more of a fund’s assets are invested in equity, it is an equity fund. The rest of the assets can be put into debt instruments. These are often termed as growth funds. Equity funds have had a track record of delivering high returns. On an average, they deliver between 10% and 12% returns, before taxes.

Types Of Equity Fund

The categorisation of equity funds depends on various factors. These include the fund house’s investment approach, the market capitalisation of the company, or what a particular fund invests in.

• Active and passive funds:

These categories refer to the investment approach. A fund manager may follow his own investment strategy. He may do this after studying the market performance and the company’s background. This is an active fund. When your investment portfolio reflects a market index like Sensex, it is a passive fund. Such funds that follow one index are also termed as index funds.

• Large-cap, mid-cap, small-cap, and micro-cap funds:

This refers to market capitalisation. Market capitalisation is the value the capital market places on a company’s equities. So, large-cap equities are usually of well-established companies. Such funds tend to be stable. Mid-cap and small-cap funds invest in smaller companies. But such companies may not have found a stable footing. So, the returns may be irregular. Some equity funds invest across large-cap, mid-cap, and small-cap stocks. These are called multi-cap funds.

• Diversified and sectoral funds:

This would tell you what the fund invests in. Diversified funds invest in a range of companies across industries. But sectoral funds invest only in one predetermined sector. There is a third category too—thematic funds. These funds invest according to a set theme. For example, a particular thematic fund might invest only in technology start-ups.

How To Pick The Right Equity Fund

There are several factors that should drive your choice. Weigh your options and think about your priorities. Every person has a unique set of circumstances. So, a strategy that may fit one person may not be the best one for another.

• Investment horizon:

Equity funds are usually long-term investments. You should stay invested for five years. If you cannot keep your money parked for that long, then equity funds may not be ideal for you. In the short term, you may not get the best returns.

• Tax benefits:

The government encourages people to invest in equity by providing tax benefits. If you invest in equity-linked saving schemes (ELSS), you get tax benefits under Section 80C. In fact, such schemes have a shorter lock-in period of three years. They offer higher returns as well.

• Risk appetite:

If you want to put your money in established companies, large-cap funds are best for you. They invest in the top 100 companies. This is suitable if you have ventured into the stock market just recently. These are less volatile, but you need to stay invested for a long time to get assured returns. If you can afford to take a calculated risk, go for diversified funds. They invest in a combination of large-, small-, and mid-cap funds. They are a good option if you are looking for high returns with less risk.

What Are The Advantages Of Equity Funds?

It is not only about high returns. Many other factors go in to make equity funds an attractive choice.

• Professional expertise:

With equity funds, you make the most of a fund manager’s expertise. They do the research and market analysis on your behalf. It saves you trouble. It also prevents you from taking any ill-informed decision.

• Diversification:

You get to invest in a range of companies. Your investment gets distributed across many sectors. So, in a sense, this moderates your exposure to risk.

• Liquidity:

You can withdraw your money any time you wish to. The only exception is an ELSS, where the lock-in period is three years.

• Systematic investment:

You can opt for a systematic investment plan (SIP). This way, you put in a moderate amount of money at fixed intervals. This helps one build a habit of investing regularly.

• Tax benefits:

With ELSS, you get benefits under Section 80C. With other kinds of equity funds, the rate of tax depends on your investment period. If you stay invested for up to one year, you need to pay short-term capital gains tax at 15%. If you stay invested for a longer period, you are liable to pay long-term capital gains tax. If your gains are over Rs 1 lakh, your tax will be 10%.

Conclusion:

For those venturing into the stock market, equity funds are a great choice. You get to invest across sectors under professional guidance and regulate your risk exposure. You also get tax benefits and higher returns. On an average, equity funds give a return of 10% to 12% in India. Before you start investing in mutual funds, there are a few more important points to keep in mind like taxation. This can affect your total financial returns. To know about these factors, Click here