Equity mutual funds primarily invest in stocks or shares of different companies in diverse sectors. These funds promise long-term returns and offer better capital appreciation than debt funds. There is moderate risk involved; hence, you may need to choose suitable funds, depending on the fund manager’s reputation, current market trends, and returns.
There are two options for investing in equity mutual funds – dividend and growth. Both of these are discussed below.
There are two ways to invest in equity mutual funds: Systematic Investment Plans (SIP) and lumpsum. In the Systematic Investment Plan (SIP), you would be investing a fixed amount every month. However, you will need to invest at least Rs. 500. Similarly, you can also invest a lump sum amount, but the minimum amount is Rs. 1,000. There is no upper limit to either.
Features of equity mutual funds
The two investment options that equity mutual funds offer – dividend and growth (called plans) – have different payout systems. By choosing the dividend plan, you get the profits from your investments as dividends at regular time intervals (monthly, quarterly, half-yearly, or annually.) On the other hand, your profits may be reinvested in the same scheme instead of receiving such payouts in the growth option.
Besides this, there are many other characteristics of equity mutual funds that you should know, including:
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Type
Equity funds come in different types: small-cap, mid-cap, and large-cap, depending on the underlying stocks.
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Asset allocation
As the name suggests, equity mutual funds invest significantly in equity shares of different companies, which are a part of the pooled corpus. These investments depend on the type of equity fund. Another portion goes into fixed-income schemes and other money market instruments, while the remaining will be cash.
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Risk-return ratio
Equity mutual funds are highly volatile and risk-prone but can generate sizeable returns. For example, investing in mid-and small-cap funds may involve higher risks than large-cap equity mutual funds. However, they also yield more returns on your investments.
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Tax gains
You get two kinds of tax gains by investing in equity funds such as the ABSL Equity Fund: short-term and long-term capital gains tax. When you sell your equity funds within the first year of investing, you must pay a 15% short-term capital gains tax.
However, if you sell your equity shares after a year of purchase, you will need to pay 10% long-term capital gains tax for profits of more than Rs. 1 lakh.
Advantages of investing in equity funds
Investing in equity mutual funds, such as the DSP Top 100 Equity Fund Growth, has many benefits, including:
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Small SIPs
With equity mutual funds, you can start your investment as small as Rs. 500. Since these investments don’t necessarily need large sums of money, they are not a financial burden.
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Better diversification
Equity funds allow investors to diversify their portfolios by investing proportionately across different sectors. A diverse portfolio helps protect against sudden market fluctuations.
- Convenience
Equity funds are great investment options for first-time investors who may find it hard to invest in stocks and other money market instruments.
- Risk mitigation
Equity mutual funds rely on Asset Management Companies comprising experts who can reduce investment risks depending on geopolitical, economic, and stock factors.
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Regulation
SEBI (Securities Exchange Board of India) regulates equity funds by mandating them to disclose their periodic expense ratios, Net Asset Values (NAV), and portfolios. Hence, equity mutual funds are more transparent than others.
How to choose an equity mutual fund?
When choosing an equity fund, you must consider several factors such as its goals and performance metrics, Net Asset Values (NAV), and returns. The Net Asset Value (NAV) is the per-share price of the fund, and this value changes every day.
Every mutual fund’s value is based on its assets and liabilities. Similarly, an equity fund’s NAV also depends on the number and value of its stocks or shares. However, while the value of a mutual fund (equity or debt) depends on its NAV, it is still not the best way to determine its performance.
Investors should instead look at its periodic return values. You can get the regular return values of a mutual fund on stock exchanges, financial websites, newspapers, or through its fund managers.
Conclusion
Equity funds are one of the best ways to begin investing. However, it is essential to note that whether equity or debt, mutual fund investments involve many financial risks that you must be aware of before investing. Going through the documents carefully when investing in an equity mutual fund is crucial to avoid losses.
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