Young investors who can take higher risks to generate risk-adjusted returns often prefer investing in equity mutual funds rather than investing in direct equities. There are several benefits of investing in equity mutual funds rather than investing directly in the stock market. Let us find out a few things about equity mutual funds that might help you make an informed investment decision.
What are equity funds?
Mutual funds can be largely categorized as equity and debt schemes. While debt schemes are more focused on generating stable income by investing in fixed income securities and debt related money market instruments, equity funds are those mutual funds that invest in stocks of companies across market capitalization to generate long term capital appreciation.
How are equity funds categorized?
Equity mutual funds can either be categorized based on the market capitalization in or depending on the sector or theme. Equity funds like large cap, mid cap, small cap, multi-cap, and flexi cap. A large cap fund predominantly invests in stocks of large cap companies that are financially stable. Mid cap funds invest in mid cap company stocks. Small cap funds invest in stocks of companies with a market capitalization of less than Rs 500 crores. Flexi cap funds must invest a minimum of 65% of their total assets in large, mid, and small cap stocks. Multicap funds must invest a minimum of 25% each in large, mid, and small cap markets. Thematic and sectoral funds are those equity funds that target only those companies belonging to a particular sector or theme like pharma, crude oil, information technology, etc. Then there is the ELSS or Equity Linked Savings Scheme, a tax saving scheme that invests across the market cap. Investors can save tax every fiscal year by investing up to Rs 150000 in ELSS.
How to invest in equity funds?
There are multiple ways in which one can invest in equity funds. Investors can either directly reach out to the AMC and fill the form manually, become KYC compliant and then invest. This is the offline and traditional way of investing in equity funds. Another way to invest is by visiting the AMCs website and buying mutual funds online. Investors can also invest in mutual funds through their mobile banking app or through an app made available by the AMC or any third party aggregator. However, investors must directly get in touch with the AMC or the mutual fund broker to understand all the pre-investment formalities to commence their equity mutual fund investing journey.
What are the different investment plans made available?
Retail investors can either make a one-time lumpsum investment right at the beginning of their investment cycle, or they can consider starting a monthly SIP in any equity scheme of their choice. Systematic Investment Plan or SIP is an investment tool that allows investors to save and invest a fixed sum periodically in mutual funds. Investors can decide the SIP sum and then continue to invest that sum in the equity scheme till their investment objective is accomplished. To determine the exact sum one must invest in equity funds so that they can target their life’s financial goals, investors can use an online SIP calculator, an easy-to-use tool freely available online.
Can anyone invest in equity funds?
Although it is possible for almost anyone above the age of 18 years to invest in equity funds, investors must understand their risk tolerance before investing. Equity funds do not guarantee capital appreciation and can even generate negative returns in the short run. Hence, investors with a very high risk appetite and a long term investment horizon may consider adding equity funds to their investment portfolio.