Equity funds pool capital from multiple investors, which is managed by a fund manager who invests in the best stocks to diversify the portfolio.
Mutual Fund
Equity funds are popular with investors who want to focus on funds that have substantial growth potential. The primary objective of equity mutual funds is to invest in stocks that can generate high returns. They are an ideal choice for long-term investors who want to build wealth. This article deciphers equity funds, exploring their types, benefits, risks, and how they can contribute to financial goals.
ADVERTISEMENT
What are equity funds?
Equity funds are mutual funds that primarily invest in stocks. Equity funds target capital gains by investing in shares of companies across different industries and sizes, with the strategy to leverage the growth potential of these companies to deliver returns.
Equity funds pool capital from multiple investors, which is managed by a fund manager who invests in the best stocks to diversify the portfolio. This allows investors to own shares of various companies with a single investment, benefiting in the long run without focusing on a single stock.
Types of equity funds
Equity mutual funds can vary widely in their investment focus. Here’s a look at some of the main types:
1. Small-cap equity funds invest at least 65% in smaller, emerging companies with the potential for rigorous growth. These funds carry higher risk but may yield significant returns as these companies expand.
2. Mid-cap equity funds focus at least 65% investment in medium-sized companies that are established in comparison to small-cap companies but offer growth potential. These funds are a balance between risk and growth, ideal for moderately risk-tolerant investors.
3. Large-cap equity funds invest at least 80% in established, financially stable large-cap companies. These funds are lower in volatility, making them a safer choice for investors seeking steady growth instead of fast growth with high risk.
4. The large- and mid-cap equity category combines investments in large-cap and mid-cap companies, providing investors with a mix of stability and growth. The blend of both types helps manage risk while also allowing for higher returns than solely large-cap funds.
5. Multi-cap funds diversify at least 75% of investment in equity and equity-related instruments, like small-cap, mid-cap, and large-cap companies, offering a balance of growth and risk. These funds give investors a broad exposure to various sectors and market caps by holding funds across the market cap spectrum.
6. Equity funds can also be classified based on their investment strategy. For instance, growth funds target high-growth companies, while value funds focus on undervalued stocks with strong fundamentals. Sectoral funds invest in specific industries such as technology and healthcare, while index funds track a market index like the S&P 500.
7. Equity-Linked Savings Scheme (ELSS) is a tax-saving mutual fund investment scheme that invests at least 80% in equity and equity-related instruments. Along with the potential for high returns, ELSS funds offer a tax advantage. Investors can claim a tax deduction of up to INR 1.5 lakh under section 80C of the Income Tax Act, 1961 in a financial year for the investment they make in an ELSS fund.
What makes equity funds high-growth investments and what are their advantages
Equity funds offer a range of benefits that make them one of the best mutual fund options to consider, particularly for growth-oriented investors. These high-growth schemes have a strong chance of outperforming other investment types over the long term due to their focus on equities with substantial growth potential.
Here are some key advantages:
- Investment in growth companies: Equity funds often invest in companies expected to grow faster than the market, including innovative startups and expanding firms.
- Market exposure: By diversifying across a portfolio of stocks, equity funds provide exposure to the overall equity market, which has historically outperformed other asset classes over the long term.
- Compounding returns: The potential for significant capital appreciation allows investors to benefit from compounding returns, where growth generates additional earnings.
- Active management: Many equity funds are actively managed by skilled fund managers who analyse market trends and seize growth opportunities.
Risks to consider
Despite their advantages, equity funds carry some inherent risks. Equity funds are directly susceptible to market fluctuations, leading to potential short-term losses. Hence, it’s important for investors to have a long-term investment horizon when investing in equity funds as this allows the market fluctuations to be ironed out over time. Since equity funds carry more risk compared to debt funds, they are less likely to be selected by conservative investors.
Also, the performance of each equity fund varies in accordance with the decisions made by the fund manager, which may sometimes not meet investor expectations. Hence, it’s essential to conduct thorough research on the fund manager and their expertise when selecting an equity fund.
Conclusion
Investing in the right equity fund involves understanding investment goals, risk tolerance, and the type of fund that best aligns with one’s financial aspirations. While equity fund offers high returns and diversification, they are also susceptible to risks, such as market volatility and performance variability. With thoughtful consideration, the right equity mutual fund can be a tool for building wealth in the long term.
Subscribe today by clicking the link and stay updated with the latest news!" Click here!
