Simply allocating a portion of your monthly income can be defined as investing. There are two types of investments. One type of investment requires you to deposit your income in a bank. The other type of investment involves allocating funds to the market. One of the prominent examples of an investment scheme that allocates funds to the market is mutual funds. In these schemes, an AMC, i.e., asset management company collects money from a group of investors and deposits it in a fund. When enough money is collected into the fund, it is used to purchase different financial securities. Thanks to their potential for generating returns, mutual funds are known for being a popular investment scheme. But just purchasing a mutual fund scheme is not enough. It is equally important to sign up for the right type of mutual fund. An example of one of the variants of mutual funds is equity funds.
What are equity funds?
One of the different types of mutual funds, equity funds are known for being one of the maximum risk-reward-type variants of mutual funds. These funds allocate a major portion of your money to equities and stocks of different companies. Thanks to their risk-reward nature, these funds are also referred to as ‘growth funds’.
One of the major reasons behind the popularity of equity funds is that they are known for fetching higher returns than debt funds or even fixed deposits for that matter. Simply put, equity funds are known for promising you the best returns possible on the invested money. However, it is also important to keep in mind that there is a certain level of risk associated with these funds. That’s because, the performance and returns on equity mutual funds is dependent on the financial situation of the equity market. Also, just like in the case of mutual funds, equity funds also come with different variants.
What are the different types of equity funds?
Here are the different variants of equity funds:
- Large-cap funds:
This variant of equity funds is known for investing in well-established businesses. They focus on businesses that fall between 1 and 100 in the terms of full market capitalisation, i.e., companies that are a part of the top 100 blue-chip companies that perform exceptionally well in the market. A common advantage of allocating funds to these companies is that they fetch decent returns.
- Mid-cap funds:
These equity funds are known for focusing on businesses that (in terms of market capitalisation) that are known for falling under the ranks between 101 and 250. While these funds are probably not as risky as small-cap funds, they come with a higher degree of risk than large-cap funds.
- Small-cap funds:
A small-cap fund is known for directing its investments towards companies ranking above 250. Because of that, they are considered riskier than mid or large-cap equity funds. Simultaneously, these funds are known for coming with the potential of generating higher returns. Small-cap funds allocate funds to organisations that are yet to be discovered by the market but, may have the potential to be a front-runner in future.
What are the benefits of equity funds?
The advantages associated with equity funds are:
- These funds can help with accumulating long-term wealth:
In accordance with the name ‘equity funds’, this variant of mutual funds focuses on equities. Also, equity funds might also have the capacity of offering inflation-adjusted income. This feature might also help you to create a good corpus in the future. While equity funds are known for coming with an element of risk, it is also true that they have the capacity of bouncing back in case you were to hold on to them for a long duration. Hence, if you were to have a long long-term financial goal, investing in equity mutual funds might be an ideal investment solution.
- Equity funds are known for offering liquidity:
For a mutual fund to be liquid, it should be very easy for an investor to redeem it. These funds allocate funds to stocks which are traded on the market. The purchase and sale make equity funds highly liquid. Simultaneously, it is very easy to redeem the equity fund units whenever you want to. However, the only exception from the perspective of liquidity is equity-linked savings schemes (ELSS).
- You can avail professional help:
Like mutual funds, equity funds are also professionally managed. Analysts who are experts and experienced in the field of investment are responsible for managing these funds.
How are returns earned in equity funds?
As stated before, equity funds are known for making investments in equities. While risky, these funds are also known for fetching higher returns. The higher returns on these funds are a reward for the risks undertaken by the investors.
Signing up for equity mutual funds can help you with accumulating long-term wealth. But before signing up for the scheme, please make sure to ascertain your risk appetite.