What are Equity Mutual Funds & How to Invest in Them?
An equity fund is a type of mutual fund primarily investing in company stocks. They are also known as Growth Funds. Equity funds can be Active or Passive. In active funds, a fund manager researches and selects the best stocks. In passive funds, the manager creates a portfolio that tracks a popular market index like Sensex or Nifty Fifty. Equity funds are also categorised by market capitalisation, which is the total value of a company’s equity. These categories include large-cap, mid-cap, and small- or micro-cap funds. This discussion will focus on equity mutual funds and explore the various types, how to invest in them, and their benefits.
What is an Equity Fund?
Also known as stock funds, equity funds are investment vehicles that pool money from multiple investors to invest primarily in stocks or shares of publicly traded companies. Equity funds or equity mutual funds are mutual fund schemes. These equity mutual fund schemes may aim to allow investors to participate in potential growth. Equity investments are managed by professional fund managers who make strategic investment decisions to maximise returns for the investors. However, you can invest in equity funds and earn returns through two main sources. These main sources are (a) capital appreciation (increase in the value of the fund’s underlying equity investments) and (b) dividends (distributions of profits from the companies held in the fund). However, it’s important to note that the value of equity investments can fluctuate as they are subject to market volatility.
What are the Types of Equity Mutual Funds?
To understand equity mutual funds, let’s first examine the various types offered.
- Large-Cap Funds: This type of equity large-cap mutual funds equity investment may primarily invest in well-established and financially stable companies with large broad market capitalisations.
- Mid-Cap Funds: These large-cap equity funds usually invest in equity shares in companies with medium market capitalisations. Mid-cap equity stocks may have the potential for higher growth compared to large-cap stocks, but they may also be more volatile.
- Small-Cap Funds: Small-cap equity funds usually focus on equity investing in equities companies with small market capitalisations. These funds may have a higher risk-reward potential.
- Multi-Cap Funds: As the name suggests, multi-cap equity funds invest across companies of various market capitalisations. The allocation can vary based on market conditions and the fund manager’s strategy.
- Sector Funds: Sector funds concentrate their equity investments in specific sectors such as banking, IT, healthcare, etc. You can also invest in infra stocks for investing in infrastructure.
- Dividend Yield Funds: Dividend yield funds primarily invest in stocks that have a track record of paying regular dividends. These funds might be suitable for investors seeking regular income and potential capital appreciation.
- Value Funds: Value funds focus on stocks that can be considered undervalued by the market. Thereby aiming to identify opportunities for capital appreciation when the market recognises their worth.
- Growth Funds: Growth funds invest in companies with high growth potential, targeting capital appreciation over the long term.
- Index Funds: Index funds potentially aim to replicate the performance of a specific market index, such as the S&P 500.
Why Invest in Equity Mutual Funds?
These funds can offer investors a convenient way to access the stock market without directly purchasing individual stocks. By pooling their equity investments with other investors, individuals can benefit from diversification, as the fund invests in a broad range of companies across various sectors and industries. This diversification potentially helps to spread the investment risk and reduce the impact of any individual company’s performance on the overall fund.
How Do Equity Funds Work?
An equity mutual fund is a type of mutual fund that invests most of its money, at least 60%, in the shares of different companies. The rest can be put into money market instruments or debt securities. Depending on what the fund wants to achieve. The person in charge of the fund, called the fund manager, can decide to invest in companies that focus on growth or those that are undervalued. They can do this based on their judgment of which equity investments will make the most money.
How to Invest in Equity Mutual Funds?
If you are considering investing in equity funds, follow these steps to carry out a hassle-free process.
- Open a Demat and Trading Account: A demat account holds your shares electronically, while a trading account allows you to buy and sell shares. You can open a demat and trading account with a bank or a brokerage firm.
- Choose an Equity Fund: Many types of equity funds are available, so it’s important to choose one that is right for your investment goals and risk tolerance.
- Invest in the Equity Fund: You can invest in an equity fund through a bank, a brokerage firm, or a mutual fund house. You can also invest in a lump sum or invest through a systematic investment plan (SIP).
- Monitor Your Investment: It is important to monitor your investment regularly to track its performance and ensure it is still aligned with your investment goals.
How Can I Choose the Right Equity Fund?
When you invest in any investment tool, you start by defining your investment objectives and risk tolerance, evaluating the fund’s historical performance, and more. Therefore, to simplify the process of investing, we have categorised investors into two groups: new and seasoned.
- New Investors: Some new investors find it difficult to invest in the capital stock market due to (a) a lack of capital, (b) less knowledge about the dynamics of the stock market, or (c) a lack of expertise in investing in equity shares. Hence, they may turn to equity funds. However, many best-performing equity funds are available, and investing in large-cap equity funds can be a good option due to optimal returns.
- Seasoned Investors: However, investing in diversified equity funds is advisable. Your market knowledge can help you choose the right equity schemes and earn higher returns than other best equity mutual funds to invest in.
What are the Taxation Rules for Equity Funds?
The tax on equity mutual funds in India is as follows:
- Short-Term Capital Gains: If you sell your equity fund units within a year of purchase, you might be liable to pay short-term capital gains tax. The rate of short-term capital gains tax is 15%, irrespective of your income tax bracket.
- Long-Term Capital Gains: If you sell your equity fund units after a year of purchase, you might be liable to pay long-term capital gains tax. The long-term capital gains tax rate is 10%, without indexation benefits. However, the first ₹1 lakh of long-term capital gains might be exempted from tax.
- Indexation: Indexation is a method of adjusting an asset’s acquisition cost for inflation. This means that the cost of acquiring an asset is increased by the inflation rate so that the capital gains are taxed on the real gains, not the nominal gains.
- Dividends: Dividends paid by equity funds can be taxable in the hands of the investor. The dividend tax rate is 15%, irrespective of your income tax bracket.
What are the Factors to Consider Before Investing in Equity Mutual Funds?
Here are some of the factors to consider before investing in equity funds:
- Your Risk Tolerance: Equity investments can be considered challenging investments, so it is important to understand your risk tolerance before investing.
- Your Investment Goals: Long-term equity funds are a good investment for investors looking for high returns. However, if you need your money in the short term, you may want to consider a different type of investment.
- Fund’s Performance: It is important to look at the best equity fund’s performance over time. This will give you an idea of how the fund has managed its money and performed in different market conditions.
- Expense Ratio: The expense ratio is the fee you pay the fund manager to manage your money. It is important to choose a fund with a low expense ratio.
- Liquidity: Liquidity refers to how easily you can sell your investment. It is important to choose a liquid fund to sell your investment when necessary.
How to Invest in Equity Mutual Funds?
If you are considering investing in equity funds follow these steps to carry out a hassle-free process.
- Open a Demat and Trading Account: A Demat account is a type of account that holds your shares in electronic form. A trading account is an account that allows you to buy and sell shares. You can open a Demat and trading account with a bank or a brokerage firm.
- Choose an Equity Fund: There are many different types of equity funds available, so it is important to choose one that is right for your investment goals and risk tolerance.
- Invest in the Equity Fund: You can invest in an equity fund through a bank, a brokerage firm, or a mutual fund house. You can also invest in a lump sum or invest through a systematic investment plan (SIP).
- Monitor Your Investment: It is important to monitor your investment regularly to track its performance and make sure that it is still aligned with your investment goals.
What are the Benefits of Equity Mutual Funds?
There are many benefits to choosing the right equity fund. Some of the most important benefits include:
- Professional Management: Managed by professional fund managers with expertise in selecting stock mutual funds and managing a portfolio. This can free up your time and allow you to focus on other aspects of your life.
- Diversification: These funds potentially allow you to diversify your portfolio by investing in a variety of high-performing stocks. This can help reduce your risk and protect your investment from market volatility.
- Liquidity: Equity mutual funds in India are liquid. This means you can easily sell your investment when needed. This is important if you need to access your money in the short term.
To Wrap It Up…
In conclusion, the best equity funds might be a good opportunity for investors seeking long-term growth, diversification, and potential capital appreciation. With the expertise of professional fund managers and the ability to invest in a diversified portfolio of equity-linked stocks, Equity mutual funds can offer access to the dynamic world of the stock market without the need for individual stock selection. However, investors must do their research or consult a financial advisor before investing.
Frequently Asked Questions About Equity Mutual Funds
Equity revolves around participating in the ownership of companies, making it a popular choice for those seeking higher returns with higher risk compared to debt or fixed-income funds.
Large-cap equity funds invest primarily in stocks of well-established, significant market-cap companies. These funds can offer stability and moderate growth potential for investors seeking a diversified portfolio.
Active funds, often equity MFs, are managed by professionals who actively select stocks to outperform the market. Like equity ETFs, passive funds usually aim to replicate a market index’s performance without active management.
Equity funds in India may have the potential to generate good returns. Over the past 10 years, the Nifty 50 index has potentially generated an annualised return of around 12%.
Diversified equity mutual funds can invest in companies across different market capitalisations and sectors. They may also invest in different industries, such as technology, financials, healthcare, and consumer staples.
A diversified equity mutual fund is a type of investment fund that may spread its investments across various stocks from different sectors to reduce risk and enhance portfolio diversification.
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