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Are you looking to grow your wealth by investing in the stock market? If you aren’t sure where to begin, equity mutual funds could be the solution. An equity mutual fund meaning refers to a fund that invests majorly in stocks. For this reason, they are also known as stock funds. Investing in stock mutual funds is mainly categorised by company size, investment style, and geography. In this article, let’s explore what is equity fund is, the types of equity mutual funds, how it works, and their benefits.
What Is Equity Fund Meaning?
An equity fund meaning refers to a mutual fund that invests primarily in stocks. The fund can be managed actively or passively (index fund). An equity fund is also referred to as a stock fund. There are several categories of stock mutual funds based on company size, investment style, and geography.
How Do Equity Mutual Funds Work?
The majority of equity funds invest in equity shares (stocks) of various companies. By investing in an equity fund, an investor becomes a part-owner of the company.
An equity fund invests in stocks based on two factors. The first factor is the fund’s category. According to SEBI regulations, equity funds are categorised either according to their investment style or according to their investing universe, and they must adhere to the rules defined for their respective category. As an example, Large Cap Funds must invest at least 80% of their corpus in top 100 Indian companies. In the same way, Mid Cap Funds should invest at least 65% of their assets in medium-sized Indian companies.
Once a fund category is defined, its investment universe is also defined. Next, the Fund must decide which stocks to choose from this universe. Here comes the role of the Fund Manager and his team. They are market and finance professionals. They evaluate various technical and fundamental indicators, such as the profitability of companies, their ability to survive challenging phases in the economy, their area of operation, etc. Based on this analysis, they determine which stocks to purchase, at what price to sell, and how many stocks to purchase.
A fund manager also continuously monitors how the companies, sectors, and economy perform after buying these stocks and other key factors that can affect the prices of these stocks after they are purchased.
It is common for them to remove shares of companies whose shares they have purchased if they believe they won’t perform as expected. Also, if they see some promising companies, they invest in them at an early stage. Due to their constant monitoring of the economy and financial markets, these fund managers can make tactical calls that get the most out of equity markets and deal with volatility effectively.
Types Of Equity Mutual Funds
Equity Funds can be differentiated based on:
According To The Investment Objective
All equity funds aim to increase capital, but the risk of achieving this objective varies. Further, it depends on the type of stocks the fund invests in. These are some types of equity mutual funds based on their investment objectives:
Small-cap Equity Funds
By SEBI guidelines, these equity mutual funds invest in companies ranked above 250 in full market capitalisation. These funds can provide a higher return despite being considered more risky than mid- or large-cap equity funds. The minimum percentage of assets allocated to such stocks is 65%.
Mid-cap Equity Funds
They invest in companies whose market capitalizations range from 101 to 250. They are considered less risky than small-cap funds but riskier than large-cap funds. A minimum of 65% of their assets must be invested in such stocks.
Large-cap Equity Funds
Investments in these equity mutual fund schemes are made in companies whose market capitalisations range between 1 and 100. In terms of equity fund selection, these funds are considered to be the least risky. 80% of total assets must be allocated to such stocks.
Large- & Mid-cap Equity Funds
They have the potential to offer high returns due to their equal allocation to large- and mid-cap equity and related instruments. A minimum of 35% of total assets must be allocated to large-cap and mid-cap stocks.
Multi-cap Funds
In multi-cap equity funds, companies of all sizes are invested in large-cap, mid-cap, and small-cap. The fund manager determines the predominant investments according to market conditions. A minimum of 65% of their assets must be allocated to such stocks.
According To The Investment Strategy
An investor must also understand the fund house’s investment strategy, i.e., how the stocks are selected. The major investment strategies or styles are top-down, bottom-up, value, and growth.
Top-Down Strategy
The portfolio is constructed by choosing a sector first and then acquiring stocks within it.
Bottom-Up Strategy
Regardless of the industry, well-researched stocks are bought.
Growth Strategy
A fund such as this will invest in companies that have a consistent track record of profitability and growth.
Value Strategy
The fund invests in companies with the potential for exponential growth in the future and is currently undervalued.
According To Asset Allocation
Some funds allocate their portfolio primarily to equity (at least 65%) and the rest to debt or international and domestic equity. Under the provisions of the Income Tax Act of 1961, it is crucial to consider asset allocation from a tax-efficient perspective. For income tax purposes, foreign equity funds that are mainly allocated to foreign equity are considered debt funds.
ELSS (Equity Linked Savings Scheme)
A tax-saving mutual fund investment scheme, Equity-Linked Savings Schemes (ELSS) invest primarily in equity and equity-related schemes. The majority of the corpus is invested in equity, while the rest is invested in debt.
Benefits Of Equity Mutual Funds
Investing in equity mutual funds has many benefits. Among them are:
Managed By Professionals
Equity funds are managed by fund managers, who are market experts. They analyse the performance of various companies and invest in stocks that will deliver optimal returns to investors based on market research.
Easy On Pocket
Investing in equity funds through SIPs (Systematic Investment Plans) can be done as low as Rs. 500 per week, biweekly, monthly, or quarterly. Through rupee-cost averaging, SIP investments in equity funds are popular because they help reduce volatility in equity markets.
Portfolio Diversification
Equity mutual funds expose investors to a wide range of stocks. As a result, even if some of the stocks in the portfolio underperform, the individual can still achieve capital gains through the performance of the other stocks.
Liquidity
It is possible to redeem equity fund units anytime at the applicable NAV on any business day. Investors benefit from this liquidity. However, one exception is ELSS funds, where the investor cannot liquidate until the lock-in period is over, which is three years.
Capital Growth
An equity fund can beat inflation by offering considerable returns. Through the investment of equity funds, individuals can accumulate substantial wealth.
Tax Benefits
Tax deductions are available to individuals who invest in ELSS funds. If one invests Rs. 1.5 lakh into ELSS schemes, they can save up to Rs. 46,800 each year (assuming the highest income tax slab, i.e., 30% plus the education cess of 4%).
Conclusion
The equity mutual fund scheme pools your money and invests it in stocks. Various types of equity mutual funds are available, from large-cap to small-cap, growth to value, and even tax-saving ELSS schemes. Investing in equity mutual funds is attractive because of their managed expertise, easy entry through SIPs, portfolio diversification, liquidity, and capital growth potential. You can start your investment journey with Share India if you want to take advantage of equity mutual funds. You can easily open a demat account with Share India to invest in various investments and benefit from their expertise.