Equity Mutual Funds Explained
Equity mutual fund schemes collect money from various investors and invest it in equity stocks. An equity fund has a minimum exposure of 65% to equities. However, before investing in equity mutual funds, an investor must first map the investment to his/her risk profile and understand the fund’s objective.
In this article, we will explain what equity mutual funds are.
An investor must keep in mind a few things while investing in equity mutual funds such as-
The Objective of the Investment
Equity mutual funds are available in a variety of types. Therefore, an investor must first identify his/her investment objective. A significant factor that impacts the objective is an investor’s risk appetite. The main aim of investing in equity mutual funds is capital appreciation, and the investor’s risk appetite helps him/her achieve the objective.
While some people invest in order to save tax, others invest based on the market capitalisation of the stock like small-cap funds, mid-cap funds, large-cap funds, etc. The investment objective varies from one investor to another.
The investment strategy is the approach that a fund house uses to select the stocks. Some of the strategies are-
- Growth Strategy
If a fund house follows this strategy, then it will invest in companies that are growing consistently and are expected to perform well in the future.
- Value Investing Strategy
As per this strategy, a fund house will invest in equity mutual funds that are undervalued but are expected to grow exponentially.
- Top-Down Strategy
The fund house picks the sector first and then invests in stocks that are performing well in that sector.
- Bottom-Up Strategy
Fund managers research various companies extensively. The investment is made based on a company’s profitability and its potential for growth. This research is done irrespective of the sector.
Types of Equity Mutual Funds
- Small-Cap Funds
These funds consist of stocks with lower market capitalisation. Investors with a high-risk appetite should invest in small-cap funds. However, small-cap funds can offer higher returns compared to large-cap and mid-cap funds.
- Mid-Cap Funds
Funds that invest in mid-cap companies are mid-cap funds. Mid-cap companies are placed between 101 and 250 in market capitalisation. These funds are riskier than large-cap funds but give higher returns as well.
- Large-Cap Funds
Large-cap companies are listed in the top 100 in market capitalisation. These funds are more consistent compared to small-cap and mid-cap funds.
- Multi-Cap Funds
These funds consist of large-cap, small-cap, and mid-cap stocks. The fund manager allocates assets based on market fluctuations.
Benefits of Equity Mutual Funds
- Higher Profitability
Equity funds are a popular investment option because they offer higher returns. These funds have helped many investors earn high returns in the long run.
- Professional Management
Investing in equity mutual funds require extensive market knowledge. Professional managers make this task more convenient as they keep an eye on the prospects in mutual fund portfolios. It is the responsibility of fund managers to allocate assets in order to meet the objectives of the investors.
Equity funds allow investors to diversify their portfolio. It is essential to invest in different sectors in order to reduce market risk. Diversification is crucial because if a few stocks lose their value, then the stocks that have performed well can compensate for the losses.