Equity Mutual Funds.
An equity fund invests mainly in the stocks of different companies to generate returns. Equity fund investments have a higher risk than other types of mutual funds. . There are a variety of equity funds classified by their investment objective.
Equity mutual funds invest a major portion of funds in equity shares of various companies. The asset allocation is based on the type of equity fund and its alignment with the investment objective. A contingent of the market, the asset allocation can be made entirely in stocks of small-cap, mid-cap, or large-cap companies. After allocating a great proportion to the equity segment, the remaining amount can be invested in debt and other money market instruments, bringing down the element of risk and of sudden redemption requests.
Your decision to invest in equity mutual funds must be according to your investment horizon, risk tolerance, and other objectives. Only If you have a long-term goal, invest in equity funds.
What are the types of Equity Mutual Funds?
Though the objective of all equity funds is generally capital appreciation, it is the risk taken to achieve this objective that varies. This further depends upon the types of stocks that the fund invests in. Some types of equity mutual funds based on their investment objective are:
These equity fund schemes invest in companies that have a rank of 250 or above in terms of their full market capitalization (as per SEBI guidelines). These funds tend to be riskier than mid- or large-cap equity funds but can give relatively higher returns. Minimum exposure to such stocks is 65% of the total assets.
These equity fund schemes invest in companies who rank between 101 and 250 by their full market capitalization. These funds tend to be less risky than small-cap funds. Minimum exposure to such stocks is 65% of the total assets.
These equity mutual fund schemes invest in companies who rank between 1 and 100 in terms of full market capitalization. These funds are considered to be the least risky as far as equity funds go. Minimum exposure to such stocks is 80% of the total assets.
These equity mutual funds equally divide the allocation between large- and mid-cap equity in an attempt to offer high returns. Minimum exposure to both large-cap and mid-cap stocks is 35% each of the total assets.
Based on Investment Strategy:
i) Top-down strategy – It means starting with the sector first and then the stocks within that sector are chosen.
ii) Bottom-up strategy – It means that well-researched stocks are chosen irrespective of the sector.
iii) Growth strategy – fund invests in companies that have a good track record of profitability and growth and are likely to continue on the same path.
iv) Value strategy – It means that the fund will invest in companies that have the potential to grow exponentially in the future and are currently trading at a lower value.
ELSS (Equity linked savings scheme)
Equity-Linked Savings Schemes (ELSS fund) is a tax-saving investment scheme that invests mainly in equity and equity-related schemes. Under this scheme, a chunk of the investment is invested majorly in equity and the rest in debt-related securities. An individual can claim up to Rs. 46,800 (assuming the highest slab of income tax i.e. @30% plus education cess 4%) annually by investing in ELSS funds.
Performance of Equity Funds in India.
Among all the categories of mutual funds in India, equity mutual funds usually deliver relatively higher returns. The return fluctuates depending upon overall economic conditions and market movement. In order to earn returns aligned with your expectations, choose your equity funds carefully.
What are the benefits of investing in Equity Funds?
There are a lot of benefits of investing in equity mutual funds. Some of them are:
