What are Equity Funds and Why You Should Invest in Them: Are you planning to invest in Equity Funds? Then you have reached the right place. Here, we will provide you basic information about Equity Funds, such as what are Equity Funds? Why should you invest in Equity Funds? And Types of Equity Funds.
What are Equity Funds?
Equity Funds is a type of Mutual Funds, which invest in the shares of various companies. These funds can be actively or passively managed. Hence, they are also known as “Stock Funds”.
In Stock Funds, the increase and decrease which results from the rise and fall of the shares in the stock market decide the overall growth of the Mutual Funds. These funds buy shares in high quantity with the main aim of generating high returns by contributing to the company’s growth.
The main and the only purpose of Equity Funds is to generate high returns as compared to debt as well as fixed deposits. These funds can be very beneficial for long Term Goals and for building wealth.
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Why should you invest in Equity Funds?
Following are the main reasons, due to which you should invest in Equity Funds:
1. Professional Money Management
Imagine that you want to build an Office. For this, you will seek help from a professional architect. Similarly, in the case of money, don’t you think you require the help of an Expert? That’s where you need the help of a Fund Manager.
We all know, most of the fund managers have a lot of years of experience in financial research and fund management. For an Individual, to keep an eye on the portfolio is a difficult task, expect if you are a full-time investor and have a good understanding of stocks.
On the other hand, Fund Manager has a special team, which keeps eye on the rise and fall of the stocks in the market. Also, they try to determine the best stocks to buy as well as sell. The team checks all the possible risks to identify the latest stocks in the market by analyzing different aspects.
Equity Mutual Funds diversify their capital across multiple companies and sectors. Here, you will get an exposure to a lot of stocks when you start investing in Equity Funds.
Apart from these funds, some other funds such as small-cap and mid-cap funds rely on the stock of a particular market capitalization. While multi-cap funds or value funds invest in different market caps. If you are investing in different securities across various sectors then market-caps reduces the risk that may arise from limited stocks.
Apart from this, sector funds mainly focus on the stocks of that sector. However, their capitals are being diversified across stocks of that sector. Here, a sector overall growth will depend on the micro and macro-economic variables, change in the policy or any regulatory changes.
For Example, when the plastic prices crashed the stocks of that sector will be collapse or when the government introduces any higher infrastructure spending, then infrastructure stocks will go up. If you want to take high risks and you understand the risks in the sector, then you can invest between 5 -10 %.
Equity Mutual Funds are Liquid. In Equity Funds, you can buy and sell the stocks anytime, except for the Equity Linked Saving Schemes-‘ELSS’ which comes with lock in period of 3 years. By this, you can redeem your investment anytime you need or when your current price of NAV is higher than the price of NAV you purchased.
Apart from this, you can invest in the equity mutual funds when the market falls in order to buy units at lower NAV. Hence, you can manage all of your investments.
4. Economies of Sale
If you invest in the Equity funds, you will save a lot of transaction costs in the long run. For instance, if you plan to invest a fixed amount of money in the Equity Funds every year. Here, if you invest in more than 30 stocks, you will have high transaction costs.
As you move further if you are able to manage your portfolio by gaining profits and investing in high growth stocks, which results in further transaction costs. If you sell a stock before a year, you will earn a short-term capital gain of about 15%.
Before investing in stocks, please check all the costs. If the costs increase up to 3% of your portfolio value and return obtained are lower as compared to equity funds. Then you should start investing in the Equity Funds.
On the other hand:
5. Tax Benefits
If you are going to invest more than a year in Equity Mutual Funds, then the capital gain is exempted from the tax accountabilities. Apart from this, Government of India provides a tax rebate for all the ELSS (Equity Linked saving schemes) under the 80C act of 1961. You can invest in ELSS and deduct up to Rs 1,50,000 from the taxable income to decrease your tax liability.
Types of Equity Mutual Funds
Equity Mutual Funds are classified into different funds based on the investment and the type of sectors & Stocks.
1. Diversified Equity Funds
In equity funds, you can invest in various sectors and market capitalizations. It gives freedom to invest in any type of stocks. Here, you can invest in small-cap, mid-cap as well as large-cap industries. Equity funds are spread across different sectors and industries, they are not compact to investments that are linked with any specific part of the economy.
2. Sector and Thematic Funds:
Equity funds that are concerned with a specific theme or sector will fall in this category. The funds that invest in a specific industry like oil, technology, and pharma will fall under sector funds. While the funds that are based on a specific theme like latest pharma stocks or value-based stocks will fall under these funds. Also, both these funds can be diversified based on market-cap.
Even get’s better:
3. Large-cap, small-cap, mid-cap and multi-cap equity funds
These funds which invest a large part of their investment in companies with large-cap are called large-cap funds. These funds offer a stability as well as sufficient results.
Mid-cap, as well as small-cap equity funds, invest in small and medium size companies. There are certain funds which invest in small as well as medium cap industries, these are called mid and small-cap funds. All these funds are in developing phase and they return varying results.
Equity Funds gives us the freedom to invest in different sectors and helps us to reduce the amount of risk in the fund. These are known as multi-cap funds.
Equity Linked Savings Scheme (ELSS)
Have you heard about ELSS, which can give you tax savings? ELSS is also known as tax saving vehicle or an equity instrument. In ELSS, you can lock your funds for a period of 3 years, thereby it will work as a very good investment plan for all the people who want to invest in MFs and to take benefit of tax savings.
want to know the best part?
SIP – Systematic Investment Plan
SIP is one of the best and the most structured way to invest in the Equity Funds. In SIP, there is a monthly installment that happens on a pre-decided date. Here, you give the permission to the fund company to deduct the amount from your bank. SIP mainly averages out the cost of investment. Here, you will be allowed low units when markets are high. While you will receive more units at the same amount.
SIP allows you to invest in a very structured and disciplined manner. One of the main benefits of SIP is, it helps you to invest in the market if you have a small amount to invest.
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