Equity Mutual Funds
Equity investments
Buying shares is a risky investment. There are over 6800 companies listed on the Indian stock exchanges. For a layman, choosing the right stock from such a big pool is like trying to find a needle in a haystack. We have heard of people who bought shares with their life savings, without having enough knowledge of the field, and went bankrupt.
The risk of losing money by buying shares of a single company is higher than by buying fewer shares each spread across multiple companies. That is because in the first case, your returns will entirely depend on the rise and fall in the share price of a single company, whereas in the second case, the returns will depend on the share prices of multiple companies. The mutual fund companies use the same logic.
What are Equity mutual funds?
When you buy one unit in an equity mutual fund scheme, you are technically investing in multiple companies. There are various types of equity funds based on the kind of companies in which the fund is invested. These companies have different market capitalization and business sectors. Market capitalization is the total number of shares of a company multiplied by their current price. It determines the size of the company.
| Fund | Company type | Risk | Return | Remark |
|---|---|---|---|---|
| Large Cap Fund | Top 100 companies in terms of market capitalization | Moderately high | Stable | A diversified fund which gives stable performance and returns for long term investment. |
| Mid Cap Fund | Mid-cap companies – Ranked 101 to 250 in terms of market capitalization | Moderately high | High | A diversified fund with potential for faster growth and higher returns as compared to a Large Cap fund. The risk is also greater. |
| Small Cap Fund | Small companies in terms of market capitalization | Moderately high | High | Stock price is more fluctuating resulting in greater risk. The gains are also higher. |
| Sector Fund | Sector-specific companies. Example: banking sector fund, pharma sector fund, etc. | High | Higher | The cycle and performance of a particular sector determines the returns. This makes it less diversified than the above-mentioned fund types and hence, riskier. |
| Thematic Fund | Theme – specific companies. Example: Thematic-MNC, thematic-energy, thematic-PSU, etc. | High | Higher | Similar to sector fund. The stock selection is broader than sector funds but narrower than diversified funds. |
| Equity Income/ Dividend Yield Scheme | Diversified companies which give a high dividend yield (dividend yield = dividend distributed/ share price) | Moderately high | High | Stable income from dividends. NAV (Fund price) fluctuates less than other equity schemes. |
| Value Fund | Diversified companies which are undervalued and whose share price is expected to go up in the future | Moderately high | High returns in long term | The risk is lower in comparison with other equity funds. It is necessarily a long-term investment. |
| Growth Fund | Diversified companies which are expected to grow at a rate higher than average | Moderately high | High | Provides capital appreciation and above-average returns in a bullish market. |
| Focused Fund | Diversification in limited number of companies | Moderately high | High | Selection of limited stocks increases the risk as the returns depend on those few stocks. But if the performance of those stocks is good, the returns are high. |
| Equity Linked Savings Scheme | Diversified companies | Moderately high | High | This fund offers tax benefits to the investors under section 80C. The invested amount gets locked in for 3 years. |
Who should invest in equity mutual funds?
Investments in equity mutual funds are considered to be long-term investments. The reason for this is, the stock market is volatile in the short-term. An investor should avoid getting caught in the everyday highs and lows of the stock market. The minimum recommended investment period is at least three years.
Investing in equity funds is not for the weak hearted who will panic at every small deviation in the stock price. There are always going to be ups and downs in the stock market. Once invested, you should have the patience and mental capability to wait it out and get good returns. When it comes to long-term investments, goal-based planning makes it easy for you to stick to your resolution.
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