Equity funds are a type of mutual fund that invests mostly in shares to achieve more returns through the potential growth pace of such. In this sense, it is a gateway into the world of stocks and equities that promise higher earnings. This blog post aims to provide detailed information about different types of equity funds, their benefits as well as risks involved.
What are Equity Mutual Funds?
Equity mutual funds primarily invest in different companies’ shares and stocks. Unlike traditional fixed deposits or debt funds which give low but guaranteed returns over an agreed-term period. The success of these types of funds depends on how the stock market operates; therefore, the investor can make money if it does well.
Types of Equity Funds
Market Capitalization-Based Funds
Large Cap Mutual Funds
The large cap mutual funds generally go for those companies with market capitalization above ₹20,000 crores. They are usually industry leaders and hence have continuous profits as well as lower volatility compared to mid-cap or small-cap schemes.
Mid-Cap Mutual Funds
Mid cap mutual funds take into account companies whose market capitalization falls between ₹5,000 crores and ₹20,000 crores. These types of funds offer a balance between growth potential and risk whereby they generate higher returns than large-cap firms but with more instability.
Small Cap Funds
Small-cap funds are specialized in companies having a market capitalization of less than Rs. 5,000 Crore. These entities possess high prospects for growth but also face high risks due to their fluctuation as well as lack of liquidity.
Multi Cap Funds
Multi cap funds spread investment across big, medium-sized, and small-cap stocks offering balanced risk-return profiles. Thus diversity helps to calm down risks that come with investing solely in one segment of the market capitalization.
Sector and Thematic Funds
- Focused Equity funds
Focused Equity funds are those that concentrate investments in a few performing companies only and therefore have the potential for better gains through active management.
- Contra Equity funds
Contra-equity funds are those funds that invest in underperforming stocks at present with the anticipation of future growth.
Tax Based Funds
- Equity Linked Saving Scheme (ELSS)
Under Section 80C of the Income Tax Act, an investor can avail tax benefits on ELSS funds where they can claim deductions up to ₹1.5 lakhs. These schemes come with a compulsory lock-in period of three years.
- Non-Tax Saving Schemes
This category includes equity-oriented schemes that do not offer any tax benefit but offer more investment choices from where investors can select instruments without having any restrictions on withdrawal as outlined by the lock-in period.
How Do Equity Mutual Funds Work?
Equity shares take up about 60% of equity mutual funds’ assets and are managed by experienced fund managers. The other 40% may be invested in debt funds or money market instruments to reduce riskiness. Managers of these funds can utilize the performance of the market by adopting either value-based or growth-based approaches to bring much returns for investors.
Features of Equity Mutual Funds
- Low Expense Ratio: SEBI sets down expense ratios on equity mutual funds that ensure investors’ mandatory cost-effectiveness.
- Tax Redemption Under Section 80C: ELSS funds provide tax benefits because investors can claim deductions with a possibility of returns.
Benefits of Equity Funds
- Professional Management
Experienced fund managers run equity funds. They use research findings and market analysis to make informed investment decisions that help their clients realize better returns than can be achieved by investing in individually selected stocks.
- Accessibility and Convenience
Equity funds allow people to take part in stock markets simply. These are normally the most convenient and easiest ways for an individual investor to invest in stocks without purchasing single shares or managing them directly.
- Potential for Higher Returns
Over the long term, equity funds could provide better returns compared to traditional forms of investments such as fixed deposits or debt funds.
Risks of Equity Funds
Market Risk
The value of equity funds in the stock market changes frequently and therefore, there may be significant losses during adverse market conditions.
Management Risk
The performance of an equity fund largely depends on the skill and judgment exercised by the fund manager. Poor investment decisions can negatively affect returns.
Liquidity Risk
Although many equity funds maintain a high level of liquidity, some have this problem like those that put money into small-cap shares hence they cannot dispose of their holdings without severely pushing down stock prices.
Who Should Invest in Equity Funds?
- Beginner Investors
These new investors can gain from the professional management and diversification offered by equity funds, thereby providing an excellent place for developing a portfolio of investments.
- Experienced Investors
These investors may use equity funds to supplement individual investments in stocks to leverage the knowledge of portfolio managers and get more diversified portfolios.
- Long-Term Investors
Stocks take many years to earn returns through compounding. Thus equity funds fit well for long-term investors who can exploit market fluctuations.
Conclusion
Equity funds serve as a flexible alternative for investment since they provide diversified portfolios managed by professionals with the possibility of high returns. Though these funds are risky, one can understand the different types of equity funds and their benefits to help them make wise choices.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
