Is equity mutual fund very risky? Should I invest in equity fund?Asked
Equity Mutual Funds are funds that invest at least 65% of the corpus in equity stocks. They are the best investment vehicles for long term financial growth. All equity funds have varying levels of risk and returns usually dependent on their market capitalization. You should invest in equity mutual funds if you are comfortable with taking risk commensurate to earning higher levels of return. Investing in equity mutual funds offers the following advantages:
An equity fund is a fund which invests mainly in stock markets. The major chunk of the fund is invested in stocks of companies. It is also known as stock fund. Equity funds can be categorized into different types on the basis of market capitalization, sectors, composition of fund, investment objectives, etc.
Equity funds can provide higher returns to the investors but they come with higher risk exposure. The risk in equity funds depends on the type of equity funds you are investing. Below are the types of equity funds and risk-returns associated with them:
Large Cap Equity funds: When mutual fund invest large portion of the capital in companies having large market capitalization, these funds are called Large Cap equity funds. These funds provide sustainable returns and stability to investors.
Mid- Cap Equity funds: Here, the mutual fund invest in stocks of mid size companies. These funds provide moderate risk to investors.
Small Cap Equity funds: In these types of funds, fund manager invests major portion of the investors’ money in stocks of companies having low market capitalization.
Multi Cap Equity funds: These funds are used to minimize the risk and diversify the investment. In these funds, capital is invested in companies across different sectors.
Thematic Equity funds: When mutual fund invests in stocks of companies in specific sector such as Banking, IT, Pharmaceuticals, etc., these funds are called thematic or sector equity funds. The performance of these funds depends on the performance of a single sector. These funds provide high risk and returns to investors.
Balanced funds: In these funds, major part is invested in stocks but a certain part of money is invested in debt securities to limit the risks. These funds are known as hybrid funds. They are considered ideal for first time investors who want to invest in stock market and at the same time keeping the overall risk level low.
Equity Linked Savings Scheme: These funds provide tax savings to the investors and hence most popular among them. But these funds have a lock-in period of 3 years. Investors cannot redeem their money before the maturity date.
Should I invest in equity funds?
Depending on the risk appetite level and expected returns, investor should select the appropriate type of equity funds. Equity funds are one of the financial instruments which can give you high inflation beating returns. When the stocks ‘price rises, it reflects in the value of your investment. Investors are unable to invest in equities due to lack of stock market knowledge, these funds are the best option. They are managed by the professional fund managers. The overall risk of investing in these funds can be minimized by diversifying the portfolio. By investing in these funds, one can accumulate good amount of wealth over a period of time.