One of the easiest ways to accumulate your savings is by investing in Equity Funds. Whether you are a college-going student or a working employee or a retired person, saving and investing should never stop. They both should always go hand in hand if you want to witness positive outcomes in the future. Without saving properly, you cannot invest right. So, you have to be wise and creative when it comes to both.
Some of the popular avenues for investment are equities; either through mutual funds or stocks, gold, bonds, etc. And among these, equities have higher risk along with higher return generating capacity.
What Are Equity Funds?
Every investor invests in a particular asset class with an aim of generating returns. Equities have the upper hand in generating higher returns than any other asset class. There are two distinct ways to invest in equities. One, you can invest in the companies via their stocks. Two, you can invest in equity mutual funds which are professionally managed funds that invest in stocks of companies of different sizes. Investing in equities through mutual funds is becoming highly popular among investors these days.
As far as equities are concerned, they have a history of high risk and high return. Instead of putting your money directly into company stocks, you take the route of mutual funds to invest in equities. This class of funds generates substantial returns compared to debt funds.
If you are looking for wealth and capital appreciation, then equity funds are an ideal choice for long-term investment. This also diversifies your portfolio well. Now, before you take a leap of faith into investing in equity mutual funds, do check the assets present in the current portfolio. This will let you know the funds you have already invested in before.
How do Equity Funds Work?
Equity mutual funds invest your money in stocks of various companies with varying market capitalization. The fund manager of a mutual fund scheme is responsible for the selection of these stocks, allocation of money to them, and changing the allocation as per market conditions. The fund manager allocates the investment in companies of varied market capitalizations-small-cap, mid-cap, and large-cap stocks.
Types of Equity Funds
There are several types of equity mutual funds to invest your money in. As an investor, you should know how much risk you want to take, for how long you want to continue to be invested, and the objective of the investment before choosing the scheme. Below are the types of equity funds you can invest in.
Market Cap Equity Funds: There are different types of funds based on the market capitalization of the companies in which they invest, namely, small cap, mid cap, large-cap, and multi-cap funds. The large cap equity funds are India’s top 100 companies based on market capitalization like Reliance, and HDFC Bank. Infosys, ITC, etc. The fund managers invest the money in those top companies whose performance excels beyond the market expectations. When compared to small or mid-cap funds, the large-cap funds are least volatile to the market swings. The mid-cap funds invest in mid-sized company stocks carrying a slightly lesser market cap unlike large-cap funds but are less volatile to the market changes when compared to the small-cap funds. The companies ranked from 101 to 250 on market capitalization are considered as mid-cap companies. Small-cap funds are those funds that invest in small-sized companies. The market capitalization of small-cap companies is below Rs 5000 crore. Small-cap funds are ideal for investors who want to take high risks and are willing to diversify or build their portfolios.
Sectoral Equity Funds: These funds invest in companies in specific sectors like banking and finance, health, FMCG, IT, utilities, infrastructure, etc. These funds are cyclical like the seasons, hence, finding the right cycle is very significant to obtaining sound returns on the investments. Case-in-point, people who have invested in the health sector previously have earned considerable returns during the covid-19 pandemic. If a particular sector is flourishing, the investors also benefit simultaneously, and vice-versa.
Thematic Equity Funds: These funds are almost similar to sectoral funds, but here the funds are invested in a particular theme like social, environmental, consumption, governance, etc. While sector funds invest solely in a sector, thematic funds are more diversified than the former. Case-in-point, the health theme invests in all the pharma and health-related companies in the industry.
Focused Equity Funds: These funds invest a minimum of 65% of the funds in equities and equity-related instruments. There’s no specific restriction for this type of fund. The fund manager can invest in any kind of sector or theme. The focused equity funds are ideal for investors who can take more risk while investing in diversified stocks across sectors and industries.
Contra Funds: These funds make their investments in stocks that are not performing well at the moment. As the stocks are doing so well, it’s obvious that their price will be less in the market. So, they buy the same at less price with the expectation that the company will do better in the future. The subsequent rise in the price of the stock will yield positive returns in the future. These funds are suitable for investors who are willing to stay invested for the long term.
Tax Saving Funds: Also called Equity-linked savings schemes or ELSS funds are mutual fund schemes that offer the dual benefit of Wealth creation and tax saving. At least 80% of the funds are invested in equity and equity-related asset classes. And investors can save up to Rs 46,800 every year under Section 80C of the income tax act 1961. These funds have a lock-in period of 3 years.
Things To Consider Before Investing in Equity Funds
As you have learned about the types of equity funds, now, you have to consider certain factors that’ll aid you in guiding through the equity funds investment. These factors will solve the puzzle of picking the right equity fund.
Performance of the Fund: Before investing in funds, there are a few things you need to check. One is the fund manager’s track record and what they have achieved while operating the last fund. Two, the fund’s historic performance and the return it’s generating periodically. Third, the fund’s objective and how consistent is the return on investment in any particular fund. This information will help you in deciding whether to go with the investment or not into any fund.
Level of Risk: Generally, investing in equities is risky, but the returns are high if you take that leap of risk for your investments. If you are willing to take more risk, then you can invest in mid-cap or small-cap funds. These two funds are considered for portfolio diversification. Large-cap funds don’t carry as much high risk as they invest in well-performing companies’ stocks. Hybrid funds, an amalgam of both debt and equity, are perfect for investors who are looking for less volatility, capital security, and decent returns. Finally, don’t put all the eggs in one basket. Always invest in distinct sectors, market capitalizations, and industries to spread risk and manage returns.
Time Period: You should be clear about the time period before you plan to make your investment, i.e, long-term or short-term. Your time frame tells you whether to invest in equity or debt funds. If you want to invest in the short-term, then debt funds would be the right choice. And if you want to go for long-term investment, then you can pick equity funds. The time horizon determines the calling when it comes to picking the type of funds and your investment.
Starting Early: If you are a young enthusiastic investor and want to start saving and accumulating your wealth, then equity funds are your best pick. As age passes by, the investment pattern changes as well. Since equity funds are slightly risky, young people may have an appetite for them. But if you are about to retire after a few years, then hybrid equity funds fit the bill. Irrespective of the investment amount, starting early has its perks. The best part about investing early is that you can take advantage of the Power of Compounding and gain exponential returns.
Tax Exemption: If you want to save on the taxes you pay while accumulating wealth, then ELSS (equity-linked savings scheme) is what you should be looking for to invest in. ELSS comes under the category of equity funds where they not only benefit you in tax savings but also appreciate your capital.
Why Invest in Equity Funds?
Despite having numerous investment options, here’s to “why” you need to invest in equity funds.
Managed By Professionals: Mutual funds are basically managed by professionals with a proven track record. These are fund managers allotted by the mutual fund to look after the respective funds. Since equity funds are linked with the performance of the market, fund managers work on operating the fund to generate higher returns than what the market expected.
Inflation Adjusted Returns: Now, when it comes to fixed deposits or other debt investment instruments, the returns generated are often similar to the rate of inflation in the country if not lower. Equity funds have the upper hand in generating higher returns for the investors. And therefore gives your investment a higher chance of appreciation taking the inflation numbers into account.
Protecting Investors: All the funds are regulated by the watchdog Securities Exchange Board of India. The main role of SEBI is to keep an eye on the investors’ security and safety in the market. Hence, it’s secure to invest in mutual funds over other asset classes.
Minimum Investment: The best part of investing in equity funds is that you can always start with a small amount. The minimum investment to kickstart your investing journey in equity funds is Rs 500. You can begin this investment via a SIP or Systematic Investment Plan or even a lump sum, the choice is yours.
Who Should Invest in Equity Funds?
After learning about the “why”, the next thing you should know about is “who”. Generally speaking, this is left to the investor’s choice. But before deciding whether to invest in equities or not, just learn about your risk profile and the objective of your investment. If you are planning to hold your funds for a long period post-investment, then investing in equity funds is an appropriate decision.
Investors should be aware of the risks associated with the investment and proceed accordingly. Once you get to know the level of risk you can take, you can opt for the ideal equity scheme. If you are the type of investor who’s looking to stick for the long term, then equity funds are a good catch. If you are an investor who’s expecting considerable returns irrespective of the level of risk, then equity funds fit the bill.
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