A Complete Guide for Investing in Equity Funds

An equity fund is a mutual fund scheme that allows investors to buy ownership of publicly-traded businesses. Under this scheme, the majority of the pooled money is used to buy stocks of businesses that can potentially yield profits for its shareholders in the long-run. Investing in equity mutual funds in India is becoming increasingly popular with investors turning to SIPs and seeking the help of fund managers. Here is a quick guide for you to understand these funds: 

Benefits of Equity Mutual Funds 

Potential of Higher Returns

With the knowledge of financial markets and guidance from your fund manager, equity funds can help you earn a potentially higher return than other traditional market instruments. They use arbitrage that enables capitalizing on the price fluctuation of securities in different markets. 

Diversified Portfolio

Equity funds allow you to purchase multiple stocks with a single investment product and help in diversifying your portfolio. You can talk to your fund manager to make investments that match your financial goals with the stock’s fundamental strength, growth potential, and investment objective. It helps in minimizing the market risks in the long-run. 

Liquidity

Even the top mutual funds in India allow you to redeem your investment at any time, except for ELSS that has a lock-in period of 3 years. This allows you to conveniently redeem investments in the time of need or at a higher Net Asset Value (NAV). Such liquidity gives you better control over your investments. 

Tax-Efficiency
Equity savings funds have reduced tax liability because they are treated as equity funds for the purpose of taxation. 

Types of Equity Funds

Based on the investment objective, the types of equity funds are:

• Small-Cap Funds: Investment is riskier with at least 65% of the corpus into small-cap companies (rank above 250)
• Mid-Cap Funds: Investment is less risky with at least 65% of the corpus into mid-cap companies (rank between 101 and 250)
• Large-Cap Funds: Investment is least risky with almost 80% corpus into large-cap companies (rank between 1 and 100)
• Multi-Cap/ Diversified Funds: Investment of corpus across diversified sectors and market capitalizations

There are also equity-linked savings schemes, index funds, thematic funds, and sectoral funds that allow more investment opportunities. 

Regular and Direct Options for Investment

You can invest in equity mutual funds in India either directly or through an agent. You can invest in these funds online or by visiting the nearest branch office of the fund house. Such investments allow you to invest in the Direct (D) option of the selected equity scheme. You can also invest in equity funds through an intermediary like a mutual fund distributor, a third-party website or app, or a broker. Such investments allow you to invest in the Regular (R) version of the selected equity scheme. 

In the Regular version, the fund house pays a commission from the NAV to the intermediary. That is why they have lower NAV than Direct schemes which generate higher returns in the longer run. 

Who Should Invest in Equity Mutual Funds?

These funds are considered a long-term investment. Experts advise a long investment horizon of at least 3-5 years and above to combat market fluctuations and potentially generate higher returns. So, they are ideal for investors with moderate risk appetite and long-term financial goals.