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What is Equity Funds?
An equity mutual fund invests at least 65% of its portfolio in equity and equity-linked securities. These funds can be managed actively or passively, depending on the investment mandate. Best equity mutual funds offer excellent returns over a medium to long-term horizon.
Since equity funds predominantly invest in stocks, they are considered much riskier than debt and hybrid funds. Taking the SIP route of investment will help investors mitigate market volatility to a great extent. These funds are an excellent investment option to achieve long-term financial aspirations.
How do Equity Mutual
Funds Earn ?
In the case of equity mutual funds, there are numerous individuals who invest different amounts, creating a large pool of money. Moving ahead, an asset management company invests this corpus in stocks or equities of listed companies.
Since equity mutual funds invest in multiple companies, it offers instant diversification, thereby lowering an individual’s risk. Moreover, equity mutual funds can build value by making profitable investments and dividend payment.
The equity mutual fund will earn money in the form of the expense ratio. This is charged from each investor and it can range anywhere between 0% and 2%. This fee goes towards the management of the fund. The dividend that is earned from the stocks of companies that the fund invest in is paid to the investors. One can also sell units of the MF to earn capital gains.
Advantages of Equity Funds
Excellent long-term investment option
Tax benefits
Benefit of diversification
The potential to beat benchmark and inflation
Things to Consider as an
Investor
Fund Objectives
Best equity mutual funds aim at accumulating wealth through strategic investments. The stock picking is based on investing style, which can be value or growth investing. Value investing involves picking undervalued stocks whose price will rise, eventually leading to a profit.
Fund Types
Equity funds are further divided into purely large-cap, mid-cap, and small-cap funds. Small-cap and mid-cap funds come with a higher risk-return potential than large-cap mutual funds. Then there are multi-cap funds, which invest across stocks of all market capitalisations to maintain an optimally diversified portfolio.
Risk
Equity funds face market risk, which happens to be the most significant one. The equity funds are affected by the movements of an underlying benchmark such as Nifty or Sensex. The overall rise and fall in the index lead to the fluctuations in the value of equity funds. Such volatility is higher than that experienced by debt funds or money market funds.
Cost
Equity funds charge an expense ratio to manage your investment. SEBI has mandated the upper limit of expense ratio to be 1.05%. Actively-managed equity funds have a higher expense ratio as compared to index funds.
Financial Goals
Investing in equity mutual funds is ideal for achieving long-term financial goals, such as wealth creation or retirement planning. Being a high-risk and high return haven, these funds are capable of generating enough wealth, which may help you retire early and pursue your passion in life.
How to Evaluate Best Equity
Mutual Funds ?
Fund returns
Fund performance, in terms of return on investment, is considered the most crucial parameter for ranking or selection of funds. Investors may look at returns over a period say five years. One may select funds that have consistently outperformed their benchmark indices (index to which a fund’s returns are compared). They should also fare reasonably well when compared with their peer set over the more extended time frames.
Expense ratio
Expense ratio is the annual expense incurred by funds, and it is expressed in percentage of their average net asset. Expense ratio is what the mutual funds charge investors for managing money on their behalf.
Fund history
Active management from a trusted fund house is necessary before you invest in a fund. You must have confidence in the asset management company. Ideally, the chosen fund house should also have a clean and long business history of at least say, five years. It ensures that the fund has seen the market cycles of slump and rally numerous times.
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