A Beginner’s Guide to Equity Mutual Funds

July 28, 2020August 12, 2020

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Are you wondering what an equity mutual fund is and what are its benefits? If yes, then read this article to know more about equity mutual funds.

Before understanding what equity mutual funds are, let’s first take a look at what mutual funds are. A mutual fund is a shared fund that collects money from multiple investors and then invests the corpus in bonds, stocks, etc. An equity fund is a class of mutual funds that invests primarily in stocks. As per the Securities and Exchange Board of India (SEBI), an equity mutual fund should have a minimum exposure of 65% to equities.

Compared to other types of mutual funds such as debt funds, equity funds can provide better returns. This is the reason why many investors prefer equity mutual funds. However, equity funds expose investors to a lot of risks. But the risk might reduce if the investors stay invested in equity funds for a long period of time.

The Advantages of Investing in Equity Mutual Funds

Professional Management

Managing a portfolio requires time and comprehensive knowledge of mutual funds. When an investor invests in an equity mutual fund, his/her portfolio is managed by a professional fund manager. Therefore, an investor doesn’t have to monitor the prospects in his/her portfolio constantly. The fund manager will critically analyse various companies and make investment decisions on the investor’s behalf.

Diversification

When an investor creates a concentrated portfolio, the risk of losing money increases significantly. This is because even if a single investment undergoes depreciation, then it can severely impact the entire portfolio. Therefore, in order to reduce the risk, investors should opt for a diversified portfolio.

By investing directly in stocks, an investor might not be able to purchase many securities. However, an equity mutual fund diversifies a portfolio by investing in several stocks. This way, even if one stock underperforms, then the others can make up for the losses.

Innovative Investment Plans

Fund houses provide a variety of innovative investment plans to investors. However, an investor who plans to invest in the market directly can’t opt for such plans. Some of these plans are- SIPs, asset allocation plans, automatic reinvestment plans, etc.

Types of Equity Funds

Equity mutual funds are available in various types. Here are a few of them-

Small-Cap Funds

Under these schemes, a minimum of 65% of the total assets is invested in equity and equity-related instruments of small-cap companies. Such companies are listed at 251st or below in market capitalisation.

Mid-Cap Funds

These schemes will predominantly invest a minimum of 65% of the total assets into mid-cap companies. Such companies are ranked between 101 and 250 in market capitalisation.

Large-Cap Funds

These schemes will invest a minimum of 80% of the total assets in equity and equity-related instruments of large-cap companies. Large-cap companies are placed in the top 100 in market capitalisation.