Equity Mutual Funds offer an efficient and cost-effective way for investors to gain broad exposure to the equity markets. But, with so many to pick from, how do you know which fund is best for your needs?
When it comes to investing in equity mutual funds, there are many different types of funds to choose from. Here is a brief overview of some of the most popular types of equity mutual funds:
- Growth Funds: These funds invest in companies that are expected to experience above-average growth
- Value Funds: These funds invest in companies that are undervalued by the market.
- Index Funds: These funds track a specific index
- International Funds: These funds invest in companies outside their territories.
Each type of equity mutual fund has its own set of risks and rewards, so it’s important to do your research before investing. Talk to a financial advisor to get started.
What Is an Equity Fund?
In equity mutual funds, stocks of companies across all market capitalisations are invested to generate high returns. Compared to debt and hybrid funds, equity mutual funds have the highest potential returns due to their risk. The performance of a company determines the return on investment for investors.
Equity Mutual Funds vs. Unit Linked Insurance Plans
When it comes to saving for your future, there are two popular investment options available – equity mutual funds and unit-linked insurance plans (ULIPs). Both have their own set of pros and cons, so it is important to understand the difference between the two before making a decision.
Equity mutual funds are funds that invest in stocks and other securities. The returns from these funds are not guaranteed, but they have the potential to give you high returns if the market does well. On the other hand, ULIPs are insurance policies that also invest your money in stocks and other securities. The returns from ULIPs are guaranteed, but they tend to be lower than what you could get from equity mutual funds.
Investment Horizon
When choosing an equity mutual fund, one important factor to consider is your investment horizon. This is the amount of time you are comfortable holding onto your investment, and it will play a role in determining the types of funds that are suitable for you.
If you have a long investment horizon, you may be more willing to take on more risk in order to potentially earn higher returns. In this case, growth-oriented fundraising for startups may be a good choice. These funds typically invest in stocks of companies that are expected to experience above-average growth.
On the other hand, if you have a shorter investment horizon, you may be more focused on preserving your capital. In this case, value-oriented funds may be a better fit. These funds tend to invest in stocks that are considered to be undervalued by the market.
No matter what your investment horizon is, there is an equity mutual fund out there that can meet your needs. By taking the time to understand your goals and objectives, you can choose the right fund for you and increase your chances of achieving success.
Investment Objective
Choosing an equity mutual fund is all about figuring out what your investment objectives are. There are three primary objectives that you can choose from capital appreciation, income generation, or a combination of the two. Once you know what your objective is, you can research different fund options and find one that best aligns with your goals.
If your primary objective is capital appreciation, then you want to find a fund that invests in stocks that have the potential to grow in value over time. If income generation is your main goal, then you want to find a fund that invests in dividend-paying stocks or other income-producing securities. And if you’re looking for a combination of the two, then you’ll want to find a fund that has a mix of growth and income-oriented investments.
No matter what your investment objective is, there’s an equity mutual fund out there that can help you achieve it. The key is to do your homework and make sure that the fund you select is a good fit for your specific goals.
Who Should Invest in Equity Funds?
Investing beginners
Large-cap equity funds may be a good choice for aspiring investors who want stock market exposure. Low-risk funds invest in equity shares of top-performing companies. Companies with a long history of stable returns deliver steady returns.
Market savvy investors
Diversified equity funds may be a good option if you know the market pulse and are willing to take calculated risks. Stocks across all market capitalisations are invested in these funds. As compared to small-cap/mid-cap equity funds, these funds offer high returns at lower risk.
Types of Equity Funds
Equity funds can be classified according to their investment mandates and stocks and sectors they invest in.
Sectors and Themes Based Equity Mutual Fund
This category includes equity funds that invest in a particular industry or theme. FMCG, pharma, or technology sector funds invest in specific industries. Thematic funds focus on one specific subject, such as emerging consumer companies or international stocks. Sector funds and thematic funds are riskier due to their focus on a particular industry or theme. They face sectoral as well as market risks because of their performance. In terms of market capitalization, industry and thematic funds can be diversified.
According to Market Capitalization
- Equity funds that invest in large-cap companies are able to offer stable returns because they invest in well-established companies.
- Investing in mid-sized companies is what mid-cap equity funds do. It is not as stable as large-cap equity funds to invest in mid-cap equity funds.
- Small- and mid-cap funds: These funds invest in both small- and mid-cap funds.
- Funds that invest in small-cap funds. Market volatility and risk are higher for small-cap funds, which investors should be aware of.
- Funds that invest in stocks across all market capitalizations are called multi-cap funds. Based on market conditions, fund managers invest primarily in particular capitalizations.
According to Investment Style
A fund manager decides the portfolio composition for all the funds discussed above, which follow an active investing style. The portfolio composition of some funds, however, closely resembles an index. Index funds are equity funds that track a specific index, such as the Sensex. Passively-managed funds invest in the same companies that make up the index the fund follows, in equal proportions.
Sensex index funds invest in all Sensex companies in the same proportion as they form part of the index. Low-cost index funds don’t need active management from a fund manager. As an example, a Sensex index fund will invest in all 30 Sensex companies in the same proportion as the index. Investing in index funds is low-cost since no fund manager is involved.
Tax Benefits of Equity MFs and ULIPS
You can get some tax benefits if you choose to invest in an equity mutual fund or a ULIP. For instance, if you invest in an equity mutual fund, long-term capital gains are generally taxed at 10% after one year, while short-term capital gains are taxed at 15%.
Expenses Vs. Returns
Choosing an equity mutual fund is not as simple as looking at the expense ratio and comparing it to the return. There are other factors that must be considered when selecting a fund, such as the type of investments held in the fund, the fund’s investment objective, and the fund’s performance.
The expense ratio is important, but it is only one factor to consider when selecting an equity mutual fund. The expense ratio is the percentage of assets that are used to cover the costs of running the fund, such as the manager’s salary, administrative expenses, and fees. The lower the expense ratio, the more of the return goes to the investors.
However, even a low expense ratio does not guarantee a good return. The type of investments held in the fund, the fund’s investment objective, and the fund’s performance are also important factors to consider when selecting an equity mutual fund.
Common Mistakes to Prevent When Choosing an Equity Mutual Fund
Investors often make mistakes when choosing an equity mutual fund. Here are four common mistakes to avoid:
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Not Knowing Your Investment Goals
Before investing in an equity mutual fund, you need to know your investment goals. Are you trying to save for retirement? Are you looking for income? Once you know your goals, you can better choose a fund that aligns with them.
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Not Researching the Fees
Investment fees can eat into your returns, so it’s important to research them before investing. Some funds charge higher fees than others, so be sure to compare fees before deciding on a fund.
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Not Diversifying Your Portfolio
Equity mutual funds should only be a small part of your overall portfolio. By diversifying, you can reduce risk and potentially achieve higher returns.
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Not Monitoring Your Investment
Even if you carefully choose an equity mutual fund, it’s important to monitor it over time. The market is constantly changing, so your fund may not perform as well as it did in the past. If necessary, make changes to ensure that your portfolio aligns with your goals.
Equity Fund Performance in India
All mutual funds deliver high returns, but equity funds are the best. The average return on equity funds is 10% to 12%. Economic conditions and market movements affect returns. To earn returns in line with your expectations, choose equity funds carefully. This requires a strict following of the stock markets and knowledge of quantitative and qualitative factors.
How do Equity Funds earn?
Equity funds earn through the appreciation of the stocks they hold in their portfolio. When the value of the stocks increases, the fund’s net asset value (NAV) rises, resulting in capital gains for the investors.
Who should invest?
Investors who are looking for long-term growth and are willing to take on the risks associated with investing in stocks may consider investing in equity funds. Equity funds are suitable for individuals with a higher risk tolerance and a longer investment horizon.
How Do You Determine the History of a Mutual Fund?
If you’re looking to invest in an equity mutual fund, one of the things you’ll need to consider is the fund’s history. How long has it been around? What has its track record been like?
One way to get a sense of a fund’s history is to look at its performance over time. Another way is to look at the fund’s asset turnover ratio. This measures how much of the portfolio is turned over each year and can give you an idea of how actively the fund is managed.
Finally, you should also look at the expense ratio of the fund. This is the percentage of assets that are used to cover expenses, and it can give you an idea of how expensive it is to own shares in the fund.
Conclusion
There are a lot of different factors to consider when choosing an equity mutual fund. However, if you keep the following things in mind, you should be able to pick a fund that’s right for you: your investment goals, your risk tolerance, the size and style of the fund, and the fees. With so many funds out there, it can be tough to decide which one is right for you. But if you take the time to do your research and understand your own needs, you’ll be well on your way to picking a winner. Reach out to Vakilsearch to know more.
FAQs
Which type of equity fund is best?
The best type of equity fund depends on an individual's investment goals, risk tolerance, and time horizon. Some common types of equity funds include large-cap, mid-cap, small-cap, growth, value, and international EFTs.
Which is better, mutual funds or equity?
Mutual funds and equity are not mutually exclusive as equity funds are a type of mutual fund that invests primarily in stocks. The choice between mutual funds and equity depends on an individual's investment objectives, risk tolerance, and diversification preferences.
How to choose the best equity funds to invest?
When choosing the best equity funds to invest in, consider factors such as the fund's performance track record, expense ratio, investment strategy, fund manager's expertise, and risk management practices.
Which is the best equity fund or SIP?
SIP (Systematic Investment Plan) is an investment method, while equity funds are investment products.
Is equity the same as SIP?
No, equity and SIP are not the same. Equity refers to a type of investment that involves buying shares of stock in companies, while SIP is a method of investing in mutual funds by regularly investing a fixed amount at predetermined intervals. SIP can be used to invest in equity funds or other types of mutual funds
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