A very common question that investors – who are just starting out – are often heard asking is “What are equity funds?”. Simply put, Equity Funds are a type of Mutual Fund that primarily invests in the stock market. Also known as Growth Funds, they are widely regarded as one of the best financial instruments to multiply wealth over the long term.
What is an Equity Fund?
As stated earlier, an equity fund is a type of mutual fund, which invests primarily in stocks. An equity fund buys ownership in businesses, mostly in the form of common stocks/shares that are publicly traded.
Types of Equity Funds
Here is an overview of the various kinds of equity mutual funds.
These are considered to be equity schemes for the purpose of taxation, even though these do not invest in equity. These funds are for exploiting the price difference between the derivatives and cash markets in order to generate returns. Arbitrage funds are perfect investment vehicles for investors belonging to the highest tax bracket as investments held in them for over a year deliver long-term capital gains that are tax-free at the moment.
Equity-oriented Hybrid Funds:
Hybrid funds invest in a mix of debt and equity. These equity funds invest a minimum of 65% corpus in equity. Because of the mixed portfolio, these funds are not as volatile as the pure equity funds and offer stability when the investor needs it. This kind of equity funds suits conservative investors and beginners the best.
Large Cap Funds:
These equity funds primarily invest in big companies which they identify going by their market capitalization. The funds that invest in companies with a market cap of more than INR 10,000 crores are characterized as large cap funds. These funds are safe for investments as they invest predominantly in blue chip companies. Because they have relatively low risk associated with them, large cap funds mostly deliver modest returns.
This kind of equity funds is for investing in mid-level companies. Such funds have more risk associated with them as there are chances that these companies may not be able to fulfill their debt obligations. However, if that does not happen, these companies will turn into large and successful ones and thus any investor will be rewarded lavishly. Typically, midcap funds invest in companies that have a market cap ranging from INR 500 crores to INR 10,000 crores.
Small Cap Funds:
Best suited for investors with a very high-risk appetite, small cap funds invest in little companies that are extremely risky as they are not as established. However, these companies can also deliver phenomenal returns and really turn things around for you financially. Small cap funds are for investors with an investment horizon of a minimum 7 years. Small cap funds invest in companies that have a market cap lesser than INR 500 crores.
This type of mutual funds invests in all market capitalizations simultaneously. This makes sure that there is less risk than narrowing down your investments in any one type of capitalization. Investors, who have a moderate risk appetite, should invest in diversified funds.
These mutual funds invest principally in a specific sector. These investments are considered to be very risky as they concentrate on a particular sector only and the fortune of a sector changes depending on the various economic cycles of that sector. So, investors, who possess a comprehensive and intimate knowledge of the sector, should invest in sector funds.
How Do Equity Mutual Funds Perform in India?
These mutual funds also generate before-tax returns of 10%-12% on an average. However, these numbers fluctuate according to the overall economic condition and the market movements. You must be careful while choosing equity funds in order to earn returns as high as per your expectations. Follow the stock markets diligently to be aware of all the qualitative and quantitative factors and invest in the right places to achieve your financial goals.