What is equity mutual fund and how is it different from other funds?Asked
Equity mutual funds buy shares of different companies and invest the investor's money into those shares based on certain criteria.
By equity, we mean ownership. So when an individual or an institution buys stocks or shares of a company which is basically a borrower, then the individual acquires ownership in the company based on the number of units of stock or shares bought by him/her. Equity mutual funds give returns based on the market conditions. Like debt funds, they do not provide a fixed return over a period of time, but the return is dependent on the performance of the company on a daily basis. Hence the market value of equity mutual funds changes on a daily basis.
Several advantages of equity mutual funds include:
1.Capital appreciation: Equity provide higher returns and hence it adds to one’s capital appreciation
2.Diversification: Money gets invested into various companies of different sectors which lowers down the losses incurred by investment in a particular sector or a company
3.Professional expertise: Fund managers are highly qualified professionals who monitor the market continuously and take decisions on your behalf to maximize the amount of returns for your portfolio
4.Tax benefits: If equity funds are held for more than a year, then the returns become non-taxable
Hence, we deduce that equity mutual funds are funds which help us to invest our money using stocks and shares and derive higher benefits through diversification as compared to the debt mutual funds.
Equity mutual fund Invest most of the money gather from investors into stock market. The risk level in equity mutual funds are quite high and investors are advice to invest in these funds as per their risk appetite.
A lot of people follow stock markets and wish to invest in the shares offered by various companies, but they fear that they don’t have enough knowledge or don’t have sufficient time to keep track on and follow the latest buzz about the dynamic market. Equity mutual fund is the perfect solution for them as investing directly in equity market is a risk, not everyone willing to take. Broadly, there are 2 major types of mutual funds in India:
1. Equity mutual funds
Let’s see how’s it different from other mutual funds:
1. Equity fund give relatively high return on investment compared to other mutual funds.
2. Equity funds are best option for an investor with high risk appetite.
4. No deduction of taxes or TDS on the earning from debt funds. Taxes to be paid only when an investor sell or withdraw fund units and depending on period of the investment.
5. Success of these funds depends on the amount of time invested by fund house in researching and finding the right dark horse stocks. So, selecting right fund house with shrewd fund manager is the key.
6. Timing of buy and sale of equity funds is very critical as stock market is highly dynamic.
7. Tax benefit under Income Tax Act 80c.
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. If the fund manager on your behalf chooses the stocks of right companies, these funds can provide higher returns in comparison to other funds.
The primary objective of an equity mutual fund is to generate higher returns in comparison to fixed income instruments such as FDs and debt funds. Investors are participating in the growth of companies by investing in these funds. These funds are ideal for investors for fulfilling financial goals of building wealth.
There are various types of equity funds available to investors and each category provides different returns. To know more about the types of equity funds, we suggest you go through the below link:
Among the equity funds, most popular are the Equity Linked Savings Scheme (ELSS) funds, which provide tax savings to the investors. However, these funds have a lock-in period of three years. Below are the top performing ELSS 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.
A fund with an objective of investing largely in equity stocks is called an equity mutual fund. Each fund has a different amount of risk which range from moderately high to very high and each fund has a benchmark index which is used to measure its comparative performance with respect to that index.
There are various types of equity mutual funds:
Sector funds: These funds are focused towards a particular sector and their major portion of investments is in that sector. These funds usually have higher risk as their performance is dependent on the performance of that particular sector. For example, Bank funds, Auto sector funds etc.
Equity Linked Savings Scheme: Investments in these funds are subject to a lock-in period of three years but investment in these funds are covered under section 80C of the income tax.
Equity Index schemes: These funds replicate the performance of a benchmark or an index like NIFTY 50, SENSEX etc. These funds have lower expense ratio as they are passively managed that is they are matched to their benchmark and no further changes are made.
Small Cap Funds: a category of mutual fund which looks for opportunities in small cap stocks trading on BSE and NSE. Small cap funds are characterised as high risk high return funds. These funds give the highest level of return within the equity fund category. A tenure of approximately 5 years is considered as a safe investment in these funds.
Mid Cap funds: funds which invest a major component of investor’s money in mid cap stocks. These funds have an objective of seeking capital appreciation through investment in growth stocks. Investments in these funds are usually diversified across various stocks in the mid cap category to reduce the risk and maximise returns.
Large Cap Funds: These funds invest in large cap or blue chip companies of Indian stock markets. These funds are safest in in equity schemes category because their portfolio consist of large corporates in the country.
An equity mutual fund is one which invests solely in stocks of various companies. Sometimes these funds may invest privately when the investment is made in private companies which are not traded publicly. It is referred to as private equity.
Equity mutual funds provide you the option to redeem your investment at any time, except for ELSS which has a lock in period of three years. The capital gains from equity mutual funds are exempt from tax if the period of investment is longer than one year. However, these funds are highly volatile in nature.
There are three categories of equity funds:
1) Large cap mutual funds- These invest primarily in large companies and therefore are a safer investment in comparison to others. So they provide moderate returns but with a slight element of risk.
2) Mid cap mutual funds- These funds make investment in middle size companies. These are considered to be riskier than large cap funds. However, these funds also provide the opportunity to grow very fast. Mid cap funds are suitable for investors who are willing to take risk.
3) Small cap mutual funds- These fund invest in small companies and are riskier than large and mid cap mutual funds as there is a high chance of such companies not being able to manage its operations properly. However, sometimes new and innovative ideas work out and turn into successful companies.