The Government has been introducing different ways to improve the economic condition of the people. The Government has introduced several ways such as the mutual funds and savings schemes. Out of which Equity Mutual Funds is one of the clever savings fund schemes. Putting your contribution in the Equity Mutual Funds will provide you with lots of benefits. In this article, we are going to provide you the complete information regarding the Equity Mutual Funds.
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Equity Mutual Funds and Why Should one Prefer to Invest in them
The Equity Mutual Funds are the type of funds that are usually invested principally in stocks which means the Stock Market. The stocks mutual funds can be classified on the basis of the company size and other related things such as the investment style of the holdings in the portfolio and geography. The size denotes the company’s capitalization, investment style etc.
These funds buy the shares of the companies in a larger quantity with an aim to receive high returns by participating in the company’s growth. The primary objective of the Equity Funds is that it will generate higher returns than fixed income investments like the debt funds or the fixed deposits. The equity funds are ideal for fulfilling long-term goals as well as for building wealth.
Working Principle of the Equity Mutual Funds
The Equity Mutual Funds completely focuses on the assets class that is mentioned in its investment mandate. The assets denote the stocks of the companies. The equity fund can also invest in the bonds and papers as well and keep a certain amount of cash. But the primary assets of these funds are the stocks.
Every equity fund has a fund manager who has a vast knowledge and experience regarding the purchase and sells of the stocks. The fund manager has a team of research through which they can analyze and cleverly invest in the best stocks that have the highest profitability. It is the fund manager and his team who decides which stocks to invest in and which stocks to sell. You will receive this professional fund management service for a nominal annual fee which the fund deducts it from your invested money.
Types of Equity Mutual Funds
Equity Mutual Funds has a broad category of funds. There are different types of equity mutual funds and they are further categorized based on their investment mandate and the kind of stocks and sectors they invest in.
Below are some of the types of Equity Mutual Funds from the customers/ the companies and choose and select based on their needs and requirements.
Diversified Equity Mutual Funds
These are the types of funds that are mainly used to invest in the sectors and market capitalizations. Which means that the funds are not restricted to invest in a particular type of stocks. They can put their investment in any type of company, be it large companies or mid-sized company or small companies. These funds are also diversified across sectors and industries and they are not confined to any investments within a particular part of the economy.
Sector and Thematic Funds
These types of equity funds put their investments on those options that have a particular sector or theme. The sector funds are those that invest in one particular industry like FMCG or Pharma or Technology whereas, the thematic funds are those that follow a particular theme, like emerging consumer companies or international stocks etc. Since the sector and thematic funds are concentrated, they can be a little riskier to invest rather than the Diversified Equity Funds. It’s a 2% risky option because their performance is completely dependent on one particular section of the company. However, the sector and the thematic funds can be diversified in terms of the market capitalization.
Large Cap, Mid-Cap, Small-Cap and Multi-Cap Equity Funds
This type of equity funds invests primarily in large-cap stocks. Different funds categorize the stocks differently. The large-cap stocks are the stocks of the biggest companies of the economy. These are the well-established companies which make the large-cap funds stable and reliable in the investments.
The Mid-Cap and the small-cap equity funds are those that invest in the mid-sized and small-sized funds. One basic demerit of the small companies is that the smaller companies are prone to volatility whereas, the mid-cap and the small-cap funds deliver fluctuating returns.
The Multi-Cap Equity Funds are the types of funds that invest in the market capitalization which includes the Large-cap, Mid-Cap, small-cap funds.
Index Funds
These are the Equity Funds that follow a particular index. These are very static-managed funds that invest in the same companies, in exact same proportions that make up the index the fund follows. For example, the Sensex Index fund will have investments in all the 30 Sensex Companies in the same proportion in which the companies form a part of the index. The Index Funds are low-cost funds that do not require an active management of a fund manager.
Benefits of Investing In the Equity Funds
Easy To Investment: (Low Cost)
Anyone and everyone can invest in the Equity Mutual Fund through SIP Mode. One can start investing with just Rs 500 per month. The SIP also allows periodic investments through ECS (Electronic Clearing Service) process where the money is automatically deducted from the bank account every month at a particular date.
Capital Appreciation
Capital Appreciation Benefit is one of the basic primary reason for investing in the Equity Mutual Funds. It is one of such Financial Instrument that will provide you high inflation beating the returns. If there is an increase in the stock prices, then it will reflect in the appreciation in the invested money. Through the equity funds, one can accumulate a good amount of money after a certain period of time.
Portfolio Diversification
When you invest in the Equity Mutual Funds, it spreads into different sectors resulting in reducing the risk of losses in future. Therefore, if some stocks are underperformed at the exchange, then the outperforming ones can make up for the losses. Thus, in this way, it loses the market risk in the overall portfolio.
Financial Goal-Oriented Funds
If you have long-term financial goals, then the Equity Funds are one of the best vehicles to achieve this goal. These funds are categorized into small-cap, mid-cap and large-cap etc. along with the returns that vary from funds to funds. The higher the risk is associated, the more you have the chances of receiving Higher Returns to achieve your target amount.
Tax Planning Option
When you are investing in the Equity Linked Saving Scheme (ELSS) funds, you can avail the tax benefits. Investing a lump-sum amount for 3 years lock-in period will help you to get a tax deduction in the current financial year for up to Rs 1.5 Lakh under the Section 80C of the Income Tax Act 1961. These funds that least lock-in as compared to the other tax planning avenues and these funds provide a higher return when compared to the other Tax-saving Financial Instruments. However, the returns are market-linked and are not guaranteed.
Tax-Free Returns
If your investments in the Equity Mutual Funds go beyond the holding period of 12 years, then the returns become tax-free. However, if it is redeemed before a year then the short-term capital gain tax is applied at a rate of 15% which will reduce your appreciated capital to a higher level and your actual returns will turn negative. There it is recommended to invest for a long time so that you can earn a high compound return and get all your money tax free once redeemed.
Professionally Managed
It is not required to review the funds daily as the schemes are managed professionally by the fund managers. When an investor is unable to invest in the equities due to the lack of the Financial Market Knowledge then Equity funds are the best option to choose on the behalf of several investors.
Easy to Liquidate
Getting the collect back to the bank account is very easy when you are investing through the mutual funds. You can redeem it at any point of time. When you are in the need of money you can stop your SIP and can redeem the number of free or all the units you want. The complete process takes around a week’s time, but if your SIP has matured then you can get your money back in three days.
SIP- The Best Way to Invest in the Equity Funds
SIP which is otherwise called as the Systematic Investment Plan is the most effective way to invest in the Equity Funds. A SIP is usually a monthly investment that takes place automatically on a pre-decided date. You need to give a mandate to the fund company to deduct in the investment from your bank account.
The SIP average out the cost of your investment. This denotes that when your market level is high then you will be provided with few units. And when the markets are low, then you will be allotted with more units of the same amount. In this way, you invest in different levels of the market.
The SIPs are the automated investments that ensure you to save a designated amount of fund every month.