Home Insights Investment Insights What is an Equity Mutual Fund? Benefits of Equity Funds

What is an Equity Mutual Fund? Benefits of Equity Funds

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Equity as an asset class has the potential to offer inflation-beating returns that results in real returns. Investing in equity over the long term helps build personal wealth and can lower your reliance on earned income for sustenance. However, equity investing requires skill and experience which most lay investors find challenging. A suitable way of investing in equity is through equity funds offered by mutual funds.

What is an Equity Mutual Fund?

An equity fund invests predominantly in shares of companies (65% or more of its total assets are invested in equity or equity related instruments). The remaining is invested in debt or money market instruments. Equity funds can be categorized based on the market capitalization of the company (market capitalization is computed by multiplying the number of shares issued by the company by its current market price), the investment style or geography. Examples of mutual funds are large-cap funds, equity growth funds, Index funds, etc.

How do Equity Mutual Funds work?

For an investor, investing in equity funds simply requires him to fill in the application form, complete the Know-Your-Customer or KYC requirements and fill in the cheque for the investment amount or transfer funds online to the mutual fund to make his investment in the mutual fund. The rest is taken care of by the fund. However, it's important to understand how the mutual fund actually manages your investments.

In Equity mutual funds pool the money collected from investors is invested in portfolio consisting of equity or equity related schemes. Stocks are selected based on extensive research and analysis by the fund management team of the mutual fund.
The mutual fund issues units (which are similar to shares) to its investors in proportion to their investments in the fund.
The price of each unit is represented by its Net Asset Value (NAV), which is the current market value of total assets of the fund minus liabilities, divided by the total number of units issued.
The NAV of the fund fluctuates with the change in the prices of the underlying equity securities and is updated every day after the market closes.

Benefits of Equity Mutual Funds

Equity funds offer a number of advantages to investors. Here are some key ones:

Professional expertise: Equity funds are an ideal investment vehicle for investors who are not well-versed with the equity markets. Successful equity investing entails in-depth research and knowledge which many individual investors lack. It is therefore recommended to invest in equity funds where the investments are managed with the expertise of a professional fund manager.

Diversification: An equity fund invests in several stocks and thereby provides the benefit of diversification to its unit holders. By investing a small amount of money, a unit holder can gain exposure to a broad spectrum of stocks. Concentration risk, which arises when there are very few stocks in a portfolio, can be minimized by investing in an equity fund. When the portfolio has a large number of securities, adverse price movement in one particular stock will not have a large impact on the portfolio.

Transparency: The mutual fund industry is closely regulated and has stringent reporting requirements to safeguard the interest of the investors. Mutual funds are required to published the fund's complete portfolio once a month and publish the NAV of the fund on each business day.

Liquidity: In case of an open-ended scheme, if an investor wishes to exit his investments, he can redeem his units to the mutual fund and he will receive his money back within 3 to 5 business days.

Small ticket size: An investor can gain exposure to a vast range of equity securities by investing as little as Rs. 500 into an equity fund.

Who should invest in Equity Mutual Funds?

Equity funds are suitable for long-term investors looking for attractive returns by taking on fair level of risk. If you have a 5 to 10 year investment horizon, equity funds can be the right choice as there will be ample time to beat the volatility associated with ups and downs in the equity market. If you are looking for steady returns, you can invest in large-cap equity funds which invest in well-established businesses and provide a moderate-to-high rate of return. Investors looking for higher growth can venture into mid and small-cap funds which can provide exponential returns during market booms.

Building a well-diversified equity portfolio requires time, skills and a large capital outlay. You can use the mutual fund route to build your equity investment portfolio with the help of skilled and professional fund managers at a nominal cost.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.

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