What are equity funds? How do you select the best equity fund?

1. What are equity funds?

As the name suggests, these are Funds that invest into equity shares of listed companies that trade on the stock market. The objective of such funds typically is to participate in the long term growth opportunity that is offered by equities.

2. Are Equity funds and Mutual Funds the same?

While they are one of the most popular categories with investors, Equity funds are only one type of Mutual Funds. There are other categories or types of Mutual Funds such as Debt Funds, Liquid Funds etc. The objectives of different categories of Funds can be varied, and investors should make it a point that they understand and invest in the correct type based on what they are looking for.

3. Why should investors consider equity funds for their savings?

Most investors have specific long-term needs that they are saving for. Equities are a growth-oriented asset that can help investor savings generate reasonable returns over the long term. To invest in equities and build a diversified portfolio, consider exploring a variety of mutual funds seamlessly using our Mutual fund app. A key issue to be tackled is that equity markets tend to be extremely noisy and volatile in the short term and this tends to confuse and scare away investors. However, equity funds offer ways to make regular investments that will reduce the impact of short term market swings while still allowing investors to participate in the long term growth opportunity.

4. What is the difference between directly buying equity shares and investing in equity funds?

There are thousands of companies listed on the Indian stock exchanges. While equities are a growth asset, all equity shares do not offer the same growth prospects. In fact, there are significant and sustained differences in the price performance between good and bad stocks. The determinants of stock performance are several complex factors including growth potential, margins, valuation etc. Equity funds provide investors with the specialized skill of a fund management team that can factor in these factors to construct the best possible portfolio for any given objective.

5. Which is the best equity fund?

Investors, as well as fund watchers, tend to be disproportionately influenced by recent fund performance to decide the best funds to invest in. However, doing this may become misleading at times. Equity investing is a difficult exercise which is made more difficult by the persistent noise and ups and downs of share prices – a lot of which has nothing to do with fundamentals in the short term. Hence the real test of any equity fund is that it can look through these short term market volatility and can create a portfolio for capturing the longer term fundamental trends. Thus the real performance test for the managers is also the long term performance while also looking at other factors such as risk profile run by the fund and how it performs during periods of market turmoil.