What is Equity Funds - Types and Benefits of Equity Funds

What are Equity Mutual Funds?

Equity mutual funds are the ones that invest in stocks and shares of companies. These funds generate a significant amount of return and offer a diversified portfolio. These are a good option if invested for at least 5 years.

Equity funds' major focus is stocks, which are carefully selected by the fund managers to deliver the maximum returns on your investments. Generally, equity mutual funds have 40 to 50 stocks in their portfolio, which ensures that the overall fund risk is minimised and that the fund can generate consistent wealth appreciation in the future. 

Top Equity Funds to Invest In

1. QUANT ELSS TAX SAVER-G

Quant ELSS Tax Saver are recommended for investors who want to invest money for at least three years along with additional perks like tax saving and potential high returns.

2. QUANT FLEXI CAP-G 

Quant Flexi Cap is suitable for investors looking to invest for at least three to four years. These funds offer high returns on investments in large, mid, and small-cap equities and government securities. 

3. MAHINDRA MANULIFE MULTI CAP REG-G 

Consider Mahindra Manulife Multi Cap Reg-G if you are looking for positive returns with a high risk. The lock in period for the equity fund is at least three to four years. 

4. ICICI PRU BHARAT 22 FOF-G

ICICI PRU Bharat 22 FOF-G has been a good choice for investors. This equity fund has been known to generate high returns in the last five years with good return potential for investors. 

5. QUANT ACTIVE-G 

Quant Active-G is known to generate consistent returns over the years. The fund is suitable for investors who can bear a certain risk but can expect high returns among multi cap funds. 

Types of Equity Mutual Funds

Equity mutual funds have different investment objectives, which determine the level of risk and potential returns. Here are the main types:

1. Small-cap Equity Funds: Portfolio of riskier companies with higher potential returns. Minimum 65% exposure to such stocks.

2. Mid-cap Equity Funds: A Portfolio of companies less risky than small-cap funds are in the Mid-cap Equity Funds.

3. Large-cap Equity Funds: Portfolio of the least risky companies. Ensure that no less than 80% of your investments are in large-cap stocks.

4. Large- & Mid-cap Equity Funds: Large and mid-cap equity funds divide equally between large and mid-cap stock holdings for better stability.

5. Multi-cap funds: Multi-cap funds invest in large, mid-, and small-cap companies, with the fund manager deciding which investments yield better returns and growth.

How do Equity Mutual Funds Work?

Equity funds invest in a variety of companies' stocks. When you buy shares of a company’s stock, you own a part of it. Based on the style of investment, they are categorised by the regulations that have been set by the Securities and Exchanges Board of India (SEBI). In order to make investment decisions, fund managers and their teams' research and analyse indicators to find the best-performing assets for their investors.

The latter involves making strategic decisions regarding trading off positions on various securities based on results from fundamental analysis while at the same time making tactical calls on volatility or other market conditions. As such, they follow up on the company’s performance, sector performances as well as economic indicators, not forgetting the market fluctuations situations alike.

Why Invest in Equity Mutual Funds? 

Equity mutual funds allow investors to increase their wealth appreciation for the future. As these are long-term investments, it is easier to invest and expect high returns. The major benefit of investing in equity funds is that they ensure risk diversification, which mean  s your money is spread across various sectors, and if one sector goes down, you have the chance to earn wealth through the other sectors. 

Features of Equity Mutual Funds

Here are the major features of Equity Mutual Funds:

Professional Management

Skilled fund managers examine market trends and buy profitable stocks to provide the highest earnings. When one invests through a SIP, equity funds can be invested as little as Rs. 500. This, in turn, enables an individual to handle the high-level fluctuations of the market through a rupee-cost averaging technique.

Affordability

People can invest in the stock market using SIPs for Rs.500 at the lowest and thereby eliminate exchange rate risk in the markets.

Low Risks 

Investing in equity mutual funds can help reduce risks that arise from investing in individual stocks. By investing money in various funds composed of many different stocks, equity investors can spread out the risks they are exposed to.

Liquidity

Equity fund units can be redeemed on any business day, providing liquidity for investors, except for ELSS funds with a 3-year lock-in period.

Capital Growth

Equity funds have the potential to offer considerable returns, aiding in wealth accumulation over the long term.

Tax Benefits

Investing in ELSS funds offers tax deductions of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act, 1961, reducing tax liabilities effectively.

Advantages of Investing in Equity Mutual Funds

Equity mutual funds offer several advantages for investors:

• Growth Potential: Equity mutual funds generally have had greater returns compared to savings accounts or bonds, and the potential for this to increase can make it easier for you to reach your future targets, such as saving for retirement or paying off mortgages.

• Diversification: One equity fund holds stocks from multiple companies across various industries, sometimes up to hundreds. Internal diversification spreads your probability and lessens the effect of bad performance by any single stock.

• Professional Management: Equity mutual funds are managed by experienced fund managers who research and select stocks for the fund. It allows you to benefit from their expertise without picking individual stocks yourself.

• Affordability: With equity mutual funds, a diversified portfolio can be bought with only a little money, making it accessible to almost everyone, as opposed to buying stocks directly.

• Tax Advantages: Certain equity funds, like ELSS (Equity Linked Saving Schemes), offer tax benefits in India. These funds allow you to claim deductions on your taxable income under Section 80C of the Income Tax Act.

Taxation of Equity Funds

Taxes have to be paid on dividends and capital gains from Equity Funds. Dividends are additional money paid to investors when the Equity Fund has extra money. The taxation of dividends is per your income tax bracket. With capital gains, however, the tax rates depend on the duration for which mutual fund units have been held. It follows, therefore, that if you sell them off before they have stayed eleven months, you will be required to pay a Short-Term Capital Gain tax of 15%.

Factors to Consider Before Investing Equity Funds

Here are the key factors to consider before investing in equity funds:

• Investment Objective & Risk Tolerance: Evaluate your financial objectives and determine your aversion to risk. The short-term volatility of equity funds can be significant. Yet, one should not forget that, unlike most other asset types, such as bonds, they usually have better long-term returns though at higher market risk.

• Investment Horizon: Equity funds are generally suitable for long-term investments, at least 5 years or more. The longer your investment horizon, the better you can weather market fluctuations and ride out any downturns.

• Type of Fund & Diversification: Equity funds come in many forms, each with unique investment goals and risks. Thus, select investments that suit your objectives and comfort. Additionally, diversifying among sectors and asset classes reduces the risks involved in investing.

• Expense Ratio: The expense ratio is the annual fee a mutual fund charges to cover its operating expenses. Lower expense ratios mean better overall returns.

• Past Performance: When considering past returns, remember that they do not necessarily predict future ones but could show how well a particular investment has been managed. For long-term returns, choose funds that have consistently beaten their benchmarks in years gone by.

How to Pick the Best Equity Fund to Invest In?

When choosing an equity mutual fund for investing, an investor should consider their investment goals and objective of why they are looking to invest in equity funds. They should also consider risk tolerance, which means how much market risk they can take for their investment profile and the amount they have invested. Also, conducting clear research on the past performance of the equity fund and the fund manager is essential to get an idea of how well the fund will profit you in the long run.

Investors should also focus on diversification, which implies that when they choose an equity fund, their profile should be diversified, which means the fund is being invested across multiple sectors simultaneously. By considering such factors, investors can ease their struggle to choose the best equity fund.  

Who Should Invest in Equity Funds?

If you can tolerate risks and aim for increased capital appreciation, consider investing in equity funds, especially if you plan to remain an investor for five years or longer. Equity mutual funds offer diversification in your investment portfolio while giving you access to best-performing stocks.

How to Invest in Equity Mutual Funds

1. Research: Start by researching various funds to find the one that suits your investment goals

2. Risk Assessment: Understand your risk tolerance to select the appropriate fund type

3. Investment Horizon: Consider your investment duration. Equity funds generally perform better over the long term

4. Diversification: Ensure your portfolio is diversified across different fund types to mitigate risks

5. Regular Monitoring: Keep track of your investment's performance and market trends.

FAQs Related to Equity Funds

1. Is it Good to Invest in Equity Funds?

Yes, investing in equity funds is good for long-term goals. Equity funds offer potentially high returns compared to other forms of funds in India.

2. Which Type of Equity Fund is Considered the Best?

It depends on your investment goals. To choose the best type of equity fund, always research different funds to find one that aligns with your risk tolerance and investment horizon.

 3. What is the Minimum Amount to Invest in Equity Mutual Funds?

In India, the minimum amount to invest in equity mutual funds through SIPs is Rs. 500 or Rs. 1000.

Equity Mutual Funds can be an excellent choice for investors seeking higher returns and willing to tolerate the associated risks. They offer diversification and the potential for significant growth, especially over the long term. It is important to research and choose funds that align with your financial goals and risk tolerance. Regular monitoring and reassessment of your investment are also key to maximising returns. Remember, investing in equity funds is a journey, not a one-time decision.