Equity Funds - Meaning, Benefits,Types & Example (2024)

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In the ever-evolving landscape of investment options, equity funds have emerged as a powerful tool for investors seeking long-term capital appreciation. Thus, the inception of equity mutual funds can be traced back to the desire for individuals to participate in potential growth. That too without the need for direct ownership or broad market knowledge.

Therefore, it is imperative to understand the basics and the other equity mutual fund types that are available to you. Here we will explore the equity mutual fund meaning and understand their potential benefits.

What is Equity Fund?

Also known as stock funds, equity mutual funds meaning are investment vehicles that pool money from multiple investors to invest primarily in stocks or shares of publicly traded companies. Equity funds or equity mutual funds are mutual fund schemes. These equity mutual fund schemes may aim to provide investors with an opportunity to participate in the potential growth.

Equity investments are managed by professional fund managers who make strategic investment decisions to maximize returns for the investors. However, you can invest in equity funds and typically earn returns through two main sources. These main sources are (a) capital appreciation (increase in the value of the fund’s underlying equity investments) and (b) dividends (distributions of profits from the companies held in the fund). However, it’s important to note that the value of equity investments can fluctuate as they are subject to market volatility.

Best Performing Equity Mutual Funds

Let’s have a look at the list of the top funds in equities down below.

Note: The data on the top equity mutual funds in India in the list is from 10th October 2023. However, for real-time updates on stock prices and market trends, visit thesmallcase stocks collectiontoday!

Ideal Investment Vehicle

Now that we have discussed what are equity funds, let’s understand why some investors might feel that equity investments can be an ideal investment vehicle.

In many ways, equity-based mutual funds can be good investment option for investors who have limited knowledge of financial investing or lack of capital to invest. It is practical for most people to invest in equity funds.

These funds can offer investors a convenient way to access the stock market without directly purchasing individual stocks. By pooling their equity investments with other investors, individuals can benefit from diversification, as the fund invests in a broad range of companies across various sectors and industries. This diversification potentially helps to spread the investment risk and reduce the impact of any individual company’s performance on the overall fund.

What are the Types of Equity Mutual Funds?

To understand what is equity mutual funds, let’s first have a look at the various types of equity mutual funds offered.

• Large-Cap Funds: These large-cap equity funds may primarily invest in well-established and financially stable companies with large market capitalizations.
• Mid-Cap Funds: These mid-cap equity funds usually invest in companies with medium market capitalizations. Mid-cap stocks may have the potential for higher growth compared to large cap stocks, but they may also be more volatile.
• Small-Cap Funds: Small cap equity funds usually focus on investing in companies with small market capitalizations. These funds may have a higher risk-reward potential.
• Multi-Cap Funds: As the name suggests, multi-cap equity funds invest across companies of various market capitalizations. The allocation can vary based on market conditions and the fund manager’s strategy.
• Sector Funds: Sector funds concentrate their equity investments in specific sectors such as banking, IT, healthcare, etc. You can also invest in infra stocks for investing in infrastructure.
• Dividend Yield Funds: Dividend yield funds primarily invest in stocks that have a track record of paying regular dividends. These funds might be suitable for investors seeking regular income along with potential capital appreciation.
• Value Funds: Value funds focus on stocks that can be considered undervalued by the market, aiming to identify opportunities for capital appreciation when the market recognizes their true worth.
• Growth Funds: Growth funds invest in companies with high growth potential, targeting capital appreciation over the long term.9.
• Index Funds: Index funds potentially aim to replicate the performance of a specific market index, such as the S&P 500.

How Do Equity Funds Work?

An Equity Mutual Fund is a type of Mutual Fund that invests most of its money, at least 60%, in the shares of different companies. The rest of the money can be put into things like money market instruments or debt securities, depending on what the fund wants to achieve. The person in charge of the fund called the fund manager, can decide to invest in companies that focus on growth or those that are undervalued. They can do this based on their judgment of which equity investments will make the most money.

What are the Factors to Consider Before Investing in Equity Mutual Funds?

Here are some of the factors to consider before investing in equity funds:

• Your Risk Tolerance: Equity investments can be considered as challenging investments, so it is important to understand your own risk tolerance before investing.

• Your Investment Goals: Long term equity funds are a good investment for investors who are looking for the potential for high returns. However, if you need your money in the short term, then you may want to consider a different type of investment.

• Fund’s Performance: It is important to look at the fund’s performance over time. This will give you an idea of how the fund has managed its money and how it has performed in different market conditions.

• Expense Ratio: The expense ratio is the fee that you pay to the fund manager for managing your money. It is important to choose a fund with a low expense ratio.

• Liquidity: Liquidity refers to how easily you can sell your investment. It is important to choose a fund that is liquid so that you can sell your investment when you need to.

How to Invest in Equity Mutual Funds?

If you are considering investing in equity funds follow these steps to carry out a hassle-free process.

• Open a Demat and Trading Account: A Demat account is a type of account that holds your shares in electronic form. A trading account is an account that allows you to buy and sell shares. You can open a Demat and trading account with a bank or a brokerage firm.
• Choose an Equity Fund: There are many different types of equity funds available, so it is important to choose one that is right for your investment goals and risk tolerance.
• Invest in the Equity Fund: You can invest in an equity fund through a bank, a brokerage firm, or a mutual fund house. You can also invest in a lump sum or invest through a systematic investment plan (SIP).

• Monitor Your Investment: It is important to monitor your investment regularly to track its performance and make sure that it is still aligned with your investment goals.

How Can I Choose the Right Equity Fund?

Just like when you’re investing in any investment tool, start by defining your investment objectives, risk tolerance, evaluating the fund’s historical performance, and more. Therefore, to simplify the process of investing, we have categorized the investors into two – new investors and seasoned investors.

If you’re a new investor

Some new investors can find it difficult to invest in the capital stock market due to (a) lack of capital to invest, (b) less knowledge about the dynamics of the stock market, (c) or lack the expertise to invest in equity shares. Hence, they may turn to equity funds. However, there are many types of equity funds available and investing in large-cap equity funds can be a good option due to optimal returns.

If you’re a seasoned investor..

There isn’t much that we can tell you that you don’t already know! However, it’s advisable to invest in diversified equity funds. Choosing the right equity schemes and earning higher returns than other equity mutual funds potentially depends on your knowledge of the market.

What are the Taxation Rules for Equity Funds?

The tax on equity mutual funds in India is as follows:

• Short-Term Capital Gains: If you sell your equity fund units within a year of purchase, you might be liable to pay short-term capital gains tax. The rate of short-term capital gains tax is 15%, irrespective of your income tax bracket.
• Long-Term Capital Gains: If you sell your equity fund units after a year of purchase, you might be liable to pay long-term capital gains tax. The rate of long-term capital gains tax is 10%, without indexation benefits. However, the first ₹1 lakh of long-term capital gains might be exempted from tax.
• Indexation: Indexation is a method of adjusting the cost of acquisition of an asset for inflation. This means that the cost of acquisition of an asset is increased by the rate of inflation so that the capital gains are taxed on the real gains, not the nominal gains.

• Dividends: Dividends paid by equity funds can be taxable in the hands of the investor. The rate of tax on dividends is 15%, irrespective of your income tax bracket.

What are the Benefits of Choosing the Right Equity Fund?

There are many benefits to choosing the right equity fund. Some of the most important benefits include:

• Potential for High Returns: Equity funds may have the potential to generate high returns over the long term. This can be because equity stocks have historically outperformed other asset classes, such as bonds and cash.
• Professional Management: Managed by professional fund managers who have the expertise to select stocks and manage a portfolio. This can free up your time and allow you to focus on other aspects of your life.
• Diversification: These funds potentially allow you to diversify your portfolio by investing in a variety of stocks. This can help to reduce your risk and protect your investment from market volatility.
• Liquidity: Equity mutual funds are liquid, which means that you can easily sell your investment when you need to. This is important if you need to access your money in the short term.

To Wrap It Up…

In conclusion, now that we have discussed all equity funds, it might be a good opportunity for investors seeking long-term growth, diversification, and potential capital appreciation. With the expertise of professional fund managers and the ability to invest in a diversified portfolio of equity-linked stocks, equity mutual funds can offer access to the dynamic world of the stock market without the need for individual stock selection.

So, whether you’re a growth-oriented investor, a retirement saver, or someone seeking higher returns, equity funds can be a powerful tool to help you achieve your financial goals.

As always, please do your own research and/or consult a financial advisor before investing.

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