Know what Equity funds are and why you should invest in them?

Know what Equity funds are and why you should invest in them?

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The best thing about mutual fund investments is that they offer active risk management and diversification that is bundled in one single investment. Also, based on their risk appetite investors can diversify their mutual fund portfolio across asset classes. One of the best ways to mitigate overall investment risk is by keeping a long term investment horizon. And to create wealth over the long term, one can consider investing in market linked schemes like equity mutual funds.

What is an equity fund?

An equity mutual fund is an open ended equity scheme that invests the majority of its investible corpus in stocks and equity related instruments of companies listed outside India. As per SEBI mandate, ff its total corpus, an equity mutual fund invests a minimum of 80 percent in equity and equity related instruments. These funds aim at generating long term capital appreciation by diversifying their portfolio in stocks of companies spread across market capitalizations.

Types of equity mutual funds

Equity mutual funds can be largely categorized based on the market cap they choose to build their portfolio. Large cap funds, mid cap funds, small cap funds, all invest majorly in large cap, mid cap, and small cap company stocks respectively. On the other hand, flexi cap and multi cap funds spread their investment portfolio across market caps. Then their id Equity Linked Savings Scheme (ELSS) a tax saving scheme that predominantly invests in equity and equity related instruments but also comes with a tax benefit. One can also categorize equity funds as sectoral and thematic funds based on the sector or theme that they target for creating a portfolio. Finally, there are international mutual funds that offer global diversification by investing in foreign markets.

Why should you invest in equity mutual funds?

Active portfolio management

Equity mutual funds are actively managed by an elite team of experienced fund managers. These fund managers are the decision makers, and the investors have no control over the portfolio of the equity scheme. It is up to the fund managers to decide which stocks to buy/hold/sell so that the scheme is able to generate returns outperforming its underlying benchmark. Hence, even those investors who do not have a deeper understanding of how the markets function can consider investing in equity funds.

Long term wealth creation

If you are considering adding equity funds to your portfolio, you must ensure that you have an investment time horizon spanning over 5 years or more. Market linked schemes like equity funds can be highly volatile in the short run and need more time to explore their true potential. Hence, investors can either consider equity funds for long term wealth creation or target any such long term financial goals like retirement corpus, children’s wedding, buying a new house, etc.

SIP option

Since you will be investing in equity schemes for a longer duration, one way to ensure that you remain consistent without breaking the investment habit is through the Systematic Investment Plan. SIP is a simple and effective way to ensure that you save and invest a fixed sum regularly in mutual funds. Investors can decide while mutual fund scheme to invest and also decide the monthly SIP sum and continue investing this sum in the equity scheme till their investment objective is accomplished. Those who aren’t sure of the exact sum that they need to invest regularly via SIP to achieve their financial goals can even take the help of the online SIP calculator, a free tool that any layman can use.

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