What Are Equity Mutual Funds?

What Are Equity Mutual Funds?

Equity Mutual Funds are known to be one of the maximum risk-reward types of mutual funds. These funds invest a major chunk of your money in equities and stocks of different companies. They are also known as Growth funds. Equity Funds generate higher returns than fixed deposits or debt funds. In simple words, Equity Mutual funds promise to bring out the best returns possible on the invested money. However, there is a certain amount of risk associated with these funds since its performance and return is also dependent on the equity market situation.

There is various classification when it comes to investment in equity mutual funds, let’s have a proper insight of different segments in which one can invest.

Based on Sectors and Theme

Equity Mutual funds or the money invested in particular segments or sectors fall under this category. Funds in it are invested in a specific industry such as pharmaceutical, information technology, FMCG.

Theme-based funds follow one particular order. Their course of action is strictly based on themes such as emerging IT companies or international stocks. Since the sectoral and thematic funds emphasize specification, the risk factors are higher than the ordinary funds.

  • Contra equity funds
  • The basic strategy behind the investment in a contra-equity fund is mainly on radical market research. The fund manager invests the money on mediocre funds at low prices under the expectation that these stocks would perform well in the future.

  • Focused Equity Funds
  • The funds here are directly invested in the 30 of the most well-performing companies with a more significant market share. Those companies and their profitability are specified during the time of launch.

Some schemes focus on investing in companies with certain market capitalization given below are few types for the same.

  • Large-cap Funds
  • The funds invested in companies that fall under the top 100 blue-chip companies perform exceptionally well in the market. One of the most common advantages of investing in these companies is decent returns.

  • Mid-cap Funds
  • According to India SEBI’s security exchange boards, the funds invested in mediocre, which have a capitalization of fewer than 10,000 crores, fall from 101st rank to 250th rank in the stock exchange. These companies are comparatively mild in terms of risk. Moreover, it provides large returns than large-cap funds.

  • Small-cap Funds
  • The majority of the funds in this scheme are invested in the total asset of the small-cap company. According to the SEBI, the companies that fall above the 250th rank are considered small-cap companies. A considerable number of companies fall under this category in India. They are considerably more prone to risks and violations; hence, it is always advised to invest your fund in a safer domain.

  • Multi cap Funds
  • These schemes typically focus on investing more in large-cap and medium cap companies. Since they are exposed beyond large-cap companies and the risk involved varies, they are less risky than small and mid-cap funds, but the risk factor is more chronic than the large-cap companies. Interestingly, all the other funds are potentially more capable of providing stable and higher returns.

These kinds of funds are popularly known for their tax-saving nature. Apart from this, the investors get to enjoy a long-term increment in the returns.

  • Equity Link saving scheme
  • Since the scheme highlights the minimum investment of 80% of its total assets in equity and similar areas, the equity linkage saving scheme becomes a solo scheme that offers tax returns of up to 1.5 lakhs.

  • Non-tax saving scheme
  • Apart from the Equity linkage saving scheme, all the other schemes do not save taxes. It explains that the returns on investments are subjected to tax in other schemes.

Equity mutual funds are managed by experienced fund managers from different Asset Management Companies. In equity funds, 60% of assets are invested in equity shares of different companies. Depending on the investor's goals, the money can be invested fully in stocks or partially in large-cap, mid-cap or small-cap companies.

The balance amount or the remaining 40% asset can be invested in money market instruments or debt funds. This is specially done to minimize the risk. Equity funds leverage the market movements to generate maximum returns. The fund manager can either invest in a growth-oriented or value-oriented manner.

Given below are some features of Equity mutual funds.

  • Low Expense Ratio
  • The frequent purchase and sales of equity funds may lead to an increased expense ratio in the schemes, which indirectly hikes the ultimate return on mutual funds. Also, SEBI has specified a value for the expenses ratio on equity mutual funds. However, it fluctuates based on the market structure.

  • Redemption of Tax Under Section 80C
  • Equity linked saving scheme (ELSS Funds) allow investors to claim their tax under judicial section 80C. This scheme’s redeemable ability enables investors to experience a tax-free investment for an extended period of three years. Thus it offers potentially higher returns on equity mutual funds.

  • Portfolio Diversification
  • Since the essential nature of Equity mutual funds is, to begin with, investing a small amount of money in different profit-making companies, this feature gives a wide range of functionality and scope of performance. This is how your equity Portfolio is diversified and offers an excellent opportunity to gain profitable returns.

Equity Mutual funds allow you to invest indirectly in the capital market via including small amounts of money in different sectors and businesses. Traditionally it was observed that only the investors with adequate knowledge in this field were able to make the best out of it. However, things change with time. Well-qualified und managers now manage the market. They help you figure out the most suitable scheme to acquire profitable returns.

Let’s see the other ways in which the investment in Mutual funds have benefits the investors.

  • The very basic yet crucial benefit is that experts undertake the funds in that field.
  • This is considered the most convenient investment option.
  • The fund manager systematically allocates the fund in the right place.
  • It offers an easy redemption of the fund, and one can encash them anytime they like.
  • It opens a wide door for diversification as investing in small amounts provides considerable exposure to your equity portfolio, making it diversified.
  • It is a cost-effective deal as it provides exceptionally higher returns without much effort and investment.
  • By delegating the market’s radical research work, you can obtain more returns on Equity mutual funds by avoiding major decision-making involved.

There are a lot of myths revolving around the subject of investment. Investment is not a miraculous path that will instantly make you rich. It is a long-term game. If anything, it can continuously grow the existing money over a while. It is the primary source of making money out of your current money.

Investments of any kind are involved, be it real estate, Securities, Bonds, and money markets. The investors must be fully aware of the risk and their capacity to bear the risk. Apart from this, Equity Mutual funds are the safest option to invest in.

  • Budding Investors
  • Perhaps the severe controversy about investing is that only sophisticated people can make the most out of the stocks. However, the incomplete information and half knowledge are considered dangerous.

    If you are an aspiring investor, it is advisable to invest in Equity Mutual funds. It avoids the burden of making some of the complicated decisions plus, it pools together all the funds and distributes the money to the top 10 profit-making companies, which directly serves the high return.

  • Sophisticated Investors
  • If you are well established in the field and have a sound knowledge of the market, you may think of investing in diversified equity funds. The investment here is made irrespective of their size and sector to make higher gains quickly. They bring comparatively higher returns on investments in a shorter period than the sectoral or segmented funds’ investments.

  • Why should I start Investing in Mutual Funds?
  • A famous proverb goes like “The best time to plant a tree was 20 years ago.”

    Similarly, there is no best time to invest. If you are earning or saving, even if you are a student receiving pocket money, you can easily open your mutual fund account today.

    There are varieties of schemes available. All you need to do is select the most suitable scheme in sync with your risk-taking profile.

  • What are the scheme related documents? What information do these documents provide?
  • Advertisement related to Mutual funds emphasizes the statement such as “ Read the scheme related documents carefully.”

    So let’s see what these documents are?

    There are three primary documents, namely (KIM)Key information memorandum, (SID) Scheme information documents, and (SAI) Statement of additional information.

    Asset management companies make these decisions about specific schemes and are deposited at India’s security exchange board for approval. Liquidity provision, as well as the risk involved.

    The scheme information document contains all the information regarding objectives, policies, asset allocation patterns.

    On the other hand, additional information consists of sponsors, asset management companies, and trustees.

    The critical information memorandum (KIM) has all the crucial information that investors must know before investing in the scheme.

  • What is the Benefit of Staying invested in the long term?
  • The very basic idea behind long term investment in mutual funds is the compounded interest rate. Compounded interest is interest on the part. This is where it benefits. Keeping your fund invested for the long term will help you obtain more returns. The funds are compounded several times.

    Let's say if you invest 1 lakh Rs every year till your retirement, the estimated compounded interest on the maturity date will be around 2.7 crores. Hence there is no magic in this. It’s just your money making more money.

  • How often can I remove my money?
  • The decision of redemption depends on the investors. They can withdraw or redeem the money any time they need. They simply need to ensure a sufficient amount of funds in the account before redemption. There may be an exit load in some schemes, which may impact the final amount; however, the liquidity is flexible.

  • Why don't mutual funds give a fixed rate of return like FD?
  • Mutual funds are subjected to uncertainties, and there are a lot of fluctuations in the factors. Unlike fixed deposits, the returns and factors both are stable.

    In the case of fixed deposits, the Amount to be invested, returns on investments, and the period, are pre-determined by the issuer. Therefore, inflation does not influence the FDS.

    On the other hand, mutual funds are conditioned in an environment where every slight fluctuation in the system may impact the funds and the return on the day of maturity. Thus mutual funds cannot provide a fixed rate of return.

  • Should we invest daily in mutual funds?
  • So we have been consistently taught growing wisdom growing up that “slow and steady wins the race” that we, with our utmost dedication, applied at all the stages of our life, including investments.

    No doubt, systematic investment plans are trendy amongst investors these days. But investing on a routine basis is considerable, although it doesn't make a massive impact in the long run. But yes, we cannot deny that it can be taken into consideration.

    Apart from Daily SIPs, monthly, weekly, and quarterly SIPs depend upon the amount you wish to invest. However monthly SIPs are more preferable as it is easy to manage.

  • What happens when the market falls midway while you have invested for the long term?
  • Mutual funds involve a great deal of instability and complex factors, which are partially recovered through SIPs. They help to play a safe game in the market, reducing the risk to some extent.

    You can beat the market volatility by consistently investing in mutual funds. It is also significant to underline the opportunity when the NAV is low.

    Although a recession in the market brings along a lot of anxiety among investors hence it is advisable not to withdraw your lump sum amount during this period as sudden blips wouldn’t impact your returns in the long run. As a result, you might end up with far higher benefits.

  • What happens with mutual funds after an investor passes away?
  • There is no maturity of mutual funds unless they are invested in close-ended schemes.

    In case the investor passes away mid investment, the nominee can follow the required procedures to claim the money.

    But if this is not disclosed, the person claiming the funds has to prove their legal heir.

    If the investor’s family members are unaware of the investment, they will remain deprived of claiming over the funds forever.