What is Equity Fund & the Benefits of investing in it?

Whether you want to save tax or build a retirement corpus, you need to be effective with financial planning. A lot of individuals want to bring financial stability in their lives, but for that you might have to understand your short term and long term goals. We all have goals which we wish to achieve at some point of time in our lives. When you have a defined set of financial goals and learn how to prioritize them, investing in financial schemes might become a lot simpler. Bear in mind that just saving from your daily or monthly earnings might not prove to be sufficient. If you really want to get closer to your financial goals, you may have to start investing.

But before you go ahead and make the actual investment, make sure that you are aware about your risk appetite. If you are someone who has zero risk appetite and does not wish to take any chances with your finances, then you might have to settle with traditional investment tools that usually offer low interest rates. On the contrary, those who do not mind giving their investment portfolio a slightly aggressive approach by investing in schemes that have a high risk rewards ratio, then they might consider investing in equity mutual funds.

If you wish to find out more about equity funds and mutual funds in general, continue reading.

What is an equity fund?

Before we head on to equity funds, let us understand what mutual funds are. What fund houses / AMCs do is that they collect money from investors who share a common investment purpose and invest this pool of funds across the Indian economy including equity and other money market instruments like debt bonds, government securities, treasury bills, commercial papers, call money, etc. This pool of funds raised through investors is referred to as a mutual fund. It is said that the performance of a mutual fund depends on the performance of its underlying assets. Mutual fund investors receive units in the form of shares in accordance with the quantum of money invested and depending on the fund’s existing NAV (net asset value).

Mutual funds are further categorized based on their certain unique attributes like risk profile, fund size, asset allocation, investment objective, etc. One of these categories is equity fund. Here is what SEBI has to say about equity oriented schemes, “The aim of growth funds is to provide capital appreciation over the medium to long - term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. ”*

Equity mutual funds are those mutual funds that invest predominantly in equity and equity related instruments. It is because of this that equity funds are said to carry a high risk rewards ratio. Because equity funds invest in stocks of publicly listed companies they might also be considered by those individuals who wish to understand the vagaries of the stock market.

Benefits of investing in equity funds

Professionally managed: Equity funds are supposed to be managed by experienced fund managers who buy/sell securities through a strategy aimed at meeting the scheme’s investment objective. So even if you are someone who doesn't understand much about mutual funds, investing in equity funds might work in your favor.

Long term capital gains: Investments in equity schemes tend to perform when remained invested for the long run. Hence, it is better to have a long term investment horizon while investing in equity mutual funds. Investors seeking long term capital gains may consider investing in equity funds.

Exposure to various stocks: When you invest in an equity fund, you get to invest in various stocks in small quantities. This might have been difficult if you went to purchase a single stock which sometimes costs thousands of rupees.

SIP investment: There are two ways you can invest in equity funds - you can either make a lumpsum investment or you can invest through SIP. Lumpsum investment might be favored by those who have idle cash parked which may be put to better use. For those who want to give their investments a systematic approach, they may consider the option of SIP investment. With SIP, all one needs to do is instruct their bank and every month on a predetermined date, a fixed amount is debited from your savings account and is electronically transferred to the equity fund. One may continue investing in equity funds through SIP till their investment objective is achieved. One may also benefit from rupee cost averaging as every SIP investment is like a new investment where an individual is allotted units depending on the fund’s existing NAV. If you remain invested in equity funds through SIP for the long run, you may even benefit from compounding.

Equity funds might help investors achieve long term capital gains but remember that equity investments are highly volatile in nature and hence, it is better to understand your risk appetite before making investment in these funds.

*Source - https://www.sebi.gov.in/sebi_data/docfiles/20616_t.html

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.