What is Equity Fund and How to Invest in it?

News Lekhak March 02, 2023 0

Equity funds are a type of mutual fund that invests primarily in equity shares of companies listed on the stock exchange. Equity funds offer investors the opportunity to participate in the growth potential of the stock market, as equity shares have the potential to generate higher returns over the long term. Equity funds are managed by experienced fund managers who make investment decisions based on their analysis of the market, economy, and company fundamentals. These funds are diversified across sectors and stocks, which helps to manage risks.

Equity funds are suitable for investors with a higher risk appetite who are looking for long-term capital appreciation. Equity funds provide investors with the flexibility to choose from a variety of investment options that cater to different risk profiles, investment objectives, and investment horizons. Some equity funds focus on investing in large-cap stocks, which are typically less volatile and offer steady returns. Mid-cap and small-cap equity funds are suitable for investors who are willing to take higher risks for potentially higher returns. Equity funds also offer the convenience of investing small amounts regularly through systematic investment plans (SIPs) and enable investors to enjoy the benefits of compounding over the long term. However, it is important to note that equity funds are subject to market risks, and investors must conduct thorough research and consult with financial advisors before investing in them.

What is Equity Fund?

An equity fund is a type of mutual fund or exchange-traded fund (ETF) that primarily invests in stocks of publicly-traded companies. Equity funds pool money from multiple investors and use it to purchase stocks of companies that meet the fund's investment objectives. Equity funds can be diversified or focused on a specific sector or theme, such as technology or sustainable investing.

Equity funds offer investors the opportunity to participate in the stock market and potentially earn higher returns than other types of investments, such as fixed-income securities or cash. However, they also come with higher risks as the stock market can be volatile and unpredictable. Equity funds are managed by professional fund managers who conduct research and analysis to select stocks for the fund's portfolio.

Investors can purchase equity funds through a brokerage account or directly from the fund company. Equity funds charge management fees, which can vary depending on the fund's expenses and investment strategy. Some equity funds may also charge sales loads or fees for buying or selling shares. It is important for investors to carefully review a fund's prospectus and fees before investing.

Types of Equity Funds?

There are several types of equity funds, each with different investment objectives and strategies. Some common types of equity funds are:
 

• Large-cap funds: These equity funds invest in large-cap stocks, i.e., companies with a market capitalization of over $10 billion. They typically offer stability and potential long-term growth, making them suitable for investors with a moderate risk tolerance.

• Small-cap funds: These equity funds invest in small-cap stocks, i.e., companies with a market capitalization of less than $2 billion. They tend to be more volatile than large-cap funds, but they offer the potential for higher returns over the long term.

• Mid-cap funds: These equity funds invest in mid-cap stocks, i.e., companies with a market capitalization between $2 billion and $10 billion. They offer a balance between the stability of large-cap stocks and the growth potential of small-cap stocks.

• Sector funds: These equity funds invest in stocks of a particular sector, such as technology, healthcare, or energy. They are suitable for investors who want to focus on a particular industry or have a strong conviction about a specific sector's growth potential.

• Value funds: These equity funds invest in undervalued stocks, i.e., stocks that are trading at a discount to their intrinsic value. They tend to be less volatile than growth funds and offer potential returns over the long term.

• Growth funds: These equity funds invest in stocks of companies that have high growth potential. They tend to be more volatile than value funds but offer the potential for higher returns over the long term.

• Index funds: These equity funds invest in stocks that replicate a particular stock market index, such as the S&P 500. They offer low-cost exposure to the stock market and are suitable for investors who want to track the overall market performance.

Benefits from Equity Funds?

Investing in equity funds can provide several benefits, including:

• Potential for high returns: Equity funds offer the potential for high returns over the long term. Historically, equities have outperformed other asset classes like bonds and cash, providing investors with the potential for higher returns. 
• Diversification: Equity funds invest in a diversified portfolio of stocks across different sectors and industries, reducing the risk of losses due to a single stock or sector. This diversification also helps in managing risk and minimizing losses. 
• Professional management: Equity funds are managed by professional fund managers who have expertise in stock selection and portfolio management. These fund managers conduct extensive research and analysis to identify undervalued or high-growth stocks, which can result in higher returns for investors. 
• Liquidity: Equity funds are highly liquid, which means that investors can buy and sell their units at any time during market hours. This makes equity funds a more convenient investment option than direct equity investments. 
• Tax benefits: Equity funds offer tax benefits to investors, especially for long-term investments. Long-term capital gains on equity funds are taxed at a lower rate than short-term gains, making equity funds a tax-efficient investment option. 
• Low investment threshold: Equity funds have a low investment threshold, making them accessible to small investors who may not have the resources to invest in individual stocks. This allows investors to participate in the stock market with a small investment.

How to invest in Equity Funds?

Investing in equity funds is a relatively simple process. Here are the steps to invest in equity funds:

1. Open a Demat account: To invest in equity funds, you need to have a Demat account. You can open a Demat account with a registered depository participant (DP) of NSDL or CDSL. 
2. Choose a fund: Identify the equity fund that meets your investment objectives and risk profile. You can choose a fund based on factors like fund performance, expense ratio, fund manager's track record, and investment style. 
3. KYC compliance: Complete the Know Your Customer (KYC) compliance process by submitting the required documents, such as PAN card, Aadhaar card, and address proof. This can be done online or offline. 
4. Fund your account: Once your Demat account is opened, you need to fund your account to invest in the equity fund. You can transfer the funds through net banking, UPI, or a cheque. 
5. Invest: Once your account is funded, you can invest in the equity fund of your choice. You can either invest through the mutual fund company's website, online brokerages, or mobile apps. 
6. Monitor your investments: After investing, it is important to regularly monitor your investments and review the fund's performance. This will help you make informed decisions and manage your investment portfolio effectively.

Top Equity Funds to Invest?

However, here are some factors that you can consider while choosing an equity fund to invest in:

• Fund performance: Look for funds that have consistently outperformed their benchmarks and peers over the long term. 
• Expense ratio: Choose funds with a lower expense ratio, as this will impact your returns over the long term. 
• Fund manager: Consider the track record and experience of the fund manager, as their investment decisions will impact the fund's performance. 
• Investment objective: Choose funds that align with your investment objective and risk profile. For example, if you are looking for long-term growth, you may choose a large-cap equity fund, whereas if you are willing to take higher risks, you may consider a mid-cap or small-cap equity fund. 
• Asset allocation: Consider the fund's asset allocation and diversification strategy, as this will help manage risks and maximize returns.

Some of the popular equity funds in India are:

1. Axis Bluechip Fund 
2. Mirae Asset Large Cap Fund 
3. Kotak Standard Multicap Fund 
4. ICICI Prudential Bluechip Fund 
5. SBI Small Cap Fund 
6. HDFC Mid-Cap Opportunities Fund 
7. Aditya Birla Sun Life Tax Relief 96 
8. Franklin India Smaller Companies Fund 
9. DSP Midcap Fund 
10. Nippon India Small Cap Fund.

Please note that this is not an exhaustive list and it is always advisable to conduct thorough research before investing in any equity fund.

Conclusion:
In conclusion, equity funds are a popular investment option for those looking to participate in the growth potential of the stock market. These funds provide investors with a range of options that cater to different risk profiles, investment objectives, and investment horizons. Equity funds are managed by experienced professionals who make investment decisions based on their analysis of the market, economy, and company fundamentals. While equity funds offer the potential for higher returns over the long term, they are also subject to market risks, and investors should carefully consider their investment goals, risk tolerance, and other factors before investing in them. As with any investment, it is always recommended to seek the advice of a financial advisor before making any investment decisions.