Equity funds are also known as a stock fund. It is a fund that invests in stocks and is also known as equity securities. Stock funds can be compared with bond funds and money funds. Fund assets are mainly in stock, with some amount of cash, which is generally quite small, as opposed to bonds, notes, or other securities.
Understanding the concept of Equity Fund
Equity funds intend to produce high returns by investing in the shares of companies of various market capitalization. They produce higher returns than debt funds or fixed deposits. How the company performance appears in profit or loss determines how much an investor can perform based on his shareholdings. Furthermore, Equity Funds can also be classified as per Market Capitalisation.
Working process of Equity Funds
Equity funds invest 60% or more of their assets in equity shares of companies in changing dimensions. This should be in line with the investment order. It might be a large-cap, mid-cap or small-cap fund or a mix of market capitalization. Further, the investing method may be value-oriented or growth-oriented
After allotting a major part of equity shares, the leftover amount will go to debt and money market tools. This is to take care of sudden improvement requests as well as bring down the risk level to some extent. The fund manager makes buying or selling judgments to take benefit of the developing market movements and get maximum returns.
Features of Equity Funds
a. 80C tax exemption
ELSS is the only tax-saving investment under Section 80C of the Income Tax Act that provides you equity display (other than NPS). With its least lock-in period of 3 years and high return potential, ELSS has a good track history. You can invest in small but routine payments or a lump sum as per your affordability.
b. Cost of investment
The frequent buying and selling of equity shares often change the expense ratio of equity funds. Currently, SEBI has set the upper limit of expense ratio at 2.5% for equity funds and is thinking to reduce it further. A lower expense ratio, of course, turns into higher returns for investors.
c. Holding period
When you obtain units of equity funds, you receive capital gains. These capital gains are taxable in your hands. The charge of taxation depends on how long you stayed invested in equity funds; such a term is called the holding period.
d. Cost-efficiency & diversification
By investing in equity funds you can get the display to several stocks by investing a nominal amount.
For instance, if you have Rs 2,000 to invest, you will be capable to buy one stock of a large-cap company or one stock of 2-3 mid-cap companies. Still, your portfolio will face concentration risk. But with the same amount you can get the display to a lot many stocks when you invest in equity funds. This allows you to expand and serve meaningfully.
Benefits of Investing in Equity Funds
The benefits received from investing in mutual funds are many:
- Skillful money management
- Methodical investments
The major advantage of investing in equity funds is that you don’t need to bother about choosing stocks and sectors to invest in. Successful equity investing needs a lot of analysis and understanding. You need to deeply search of the financials of a company before you invest in it.
You also need to have any knowledge of how a particular sector is supposed to perform in the future. Of course, all of this needs a lot of time and effort, which most common investors don’t have. Hence, the solution is to leave the stock-picking to a specialist fund manager by investing in an equity fund.
Eligibility Criteria To Invest In Equity Mutual Funds
Your choice to invest in equity funds must follow to your risk limit, investment range and goals. Usually, if you have a long-term goal (say, 5 years or more), it is more satisfying to go for the best equity funds. It will also give the fund enough time to travel out the market variations.
a. For aspiring investor
If you are an aspiring investor who wants to have displayed to the stock market, then large-cap funds may be the best choice. These funds invest in equity shares of the top 100 companies in the stock market. These well-established companies have been historically producing constant returns over the long-term.
b. For market-savvy investors
In case you are well-versed with the market vibration but want to take planned hazards, you may think of spending in diversified equity funds. These invest in shares of companies across market capitalization. These give the best mixture of high results and lesser risk as compared to equity funds that only invest in small-cap/mid-caps.
Why spend in equity mutual stocks?
Among all other purchases, equity fund plans have historically been able to provide market-beating and inflation-beating results. Most secured investments like fixed deposits, recurring deposits, etc. allow a rate of interest that gives light to no increase in money value after considering inflation.
Spending in an equity mutual fund scheme means that the investor will keep a large number of stocks and shares of various companies over different business processes, themes, sectors, etc. Keeping a deep variety of stocks in one’s portfolio ensures that no high losses would occur which cannot be compensated by gains in another part of the portfolio.
As one of the only few monetary products that can give the real market and inflation-beating returns, equity mutual fund plans are the only real option for those who want to invest and develop their capital over the means to the long term.
The Equity Linked Savings Schemes, or ELSS as they’re usually known, allows for up to Rs.1,50,000 to be saved from annual taxable income every year is spent in this avenue. ELSS is also the only tax-saving investments under Section 80C that has provided so high traditional returns – no other Section 80C has been able to meet the results made by equity mutual funds.
Most equity mutual fund plans are managed by professional fund managers with advice from market examiners. This live tracking on investment securities and purchase opportunities allows for risk relief and clarifies the choice of which stocks to invest in.
Stocks and shares are sold across all major global exchanges daily. While not instantly as liquid as removing funds from a savings bank account, the liquidity allowed is more expensive than most other mutual fund schemes or investment plans.
Types of Equity Funds
You can classify equity funds based on their investment order and the kind of stocks and sectors they invest in.
a. Based on Sector and Themes
Equity funds that concentrate their investments in an appropriate sector or theme fall under this category. Sector funds invest in one appropriate industry, like FMCG or Pharma or Technology. Thematic funds follow a particular theme, like developing consumer companies or international stocks.
Considering sector funds and thematic funds concentrate on a particular sector or theme, they tend to be more dangerous. This is because of their performance face sectoral as well as market risks. However, sector and thematic funds can be diversified in terms of market capitalization.
b. Based on Market Capitalisation
Large-cap equity funds: Typically, large-cap companies are well-established companies, advancing them as large-cap funds stable and responsible investments.
Mid-cap equity funds: They spend in medium-sized companies
Mid-and-small-cap funds: There are balanced funds that invest in both mid-cap as well as small-cap stocks.
Small-cap funds: After smaller companies are likely to lightness, small-cap funds deliver varying results
Multi-cap funds: Equity funds that invest beyond market capitalization, which is in large-cap, mid-cap, and small-cap stocks, are declared as multi-cap funds.