Planning to invest in Equity Mutual Funds but don’t know where to start?
Selecting the right equity fund can be confusing for new investors. The process starts with having financial goals, knowing the risk, and regularly investing money.
The right knowledge and understanding of equity funds can help you align your portfolio with your financial goals.
If you are browsing equity funds for yourself, below are some common types you need to know. But before we dive into it, let’s get to know what exactly are Equity Mutual Funds.
Equity Mutual Funds AKA Growth Funds are different schemes of mutual funds that distribute the invested amount into stocks of different companies. The distribution takes place based on the objective of the scheme you choose.
Equity mutual funds are useful when one wants to invest in stocks without worrying about market volatility. These schemes deliver superior returns and are perfect for long-term investments.
Investing in stock markets can be intimidating for a beginner. In that case, equity mutual funds would be a safer option.
Before selecting the funds, one should evaluate various scheme regimes. Below is a brief introduction to different types of Equity Mutual Funds.
Equity mutual funds are categorized based on various investment horizons and risk factors. These categories help you choose the suitable funds that match your financial goals.
Large-cap mutual funds invest around 80% of total assets into equity shares of large-cap companies. These companies are usually between 1 to 100th in terms of market capitalization.
Large-cap funds offer stable returns and are less risky. It can be considered a safer investment option in your portfolio.
Mid-cap mutual funds invest at least 65% of total assets into mid-cap companies. These companies stand between 101st to 250th on market capitalization. Mid-cap companies are slightly more volatile than large cap. However, it can generate better returns in the long run.
In this scheme, 65% of total assets get invested into small-cap companies (251st and above in terms of market capitalization). Small-cap funds can bring in superior returns, but these funds can be highly volatile and riskier than large and mid-cap mutual funds.
These schemes distribute a minimum of 35% of total assets in large-cap stocks and 35% of total assets in mid-cap stocks. The rest of the 30% can be allocated to either category and/or debt and money market instruments. A combination of large and mid-cap brings both decent returns and stability.
Multi-cap mutual funds invest at least 75% of total assets in equity and equity-related instruments with a minimum of 25% of total assets invested each in large-cap, mid-cap stocks, and small-cap stocks. The rest of the 25% is invested in any or all of the above categories or debt and money market instruments based on the fund manager’s view. Multi-cap funds are useful for investors who want exposure in all categories but less risk than pure small-cap or mid-cap funds.
Sectoral and Thematic fund schemes focus on a particular sector or theme of the investment. Sectoral equity mutual funds invest at least 80% of total assets only in specific sectors. For Example- The pharmaceuticals, Technology, and Infrastructure sectors. The returns of these funds depend on the performance of the industries in that particular sector.
Thematic, on the other hand, invests at least 80% of total assets in a specific theme of the sector. For example, if the sector is agriculture, the thematic funds can be invested in fertilizer companies, automobile companies, chemical companies, etc.
These themes are well defined by the fund manager using SEBI regulations.
Equity Linked Savings Scheme Or ELSS is a tax-saving equity fund. An investment of up to 1.5 Lakhs in ELSS can offer tax benefits under section 80C of the Income Tax Act. With a 3-year lock-in period, ELSS invests 80% of total assets into equity and equity-related instruments. This scheme is highly suitable for anyone looking for tax benefits.
1. Mutual funds diversify your money into various stocks thereby offering better risk-adjusted returns.
2. You can take advantage of tax benefits from ELSS mutual funds under section 80C of the Income Tax Act.
3. If you don’t have a lump sum amount, you can opt for a Systematic Investment Plan (SIP).
Equity mutual funds offer flexibility and ease of investment.
4. You only have to invest money and fund managers/experts take care of managing the funds.
Equity mutual funds are perfect for long-term investments. You can choose the right fund(s) based on your financial goals and investment preferences. Since Mutual Funds are a great medium to build wealth over the long term, it’s best to start investing when you are young. If you are new to equity funds, go with lower-risk schemes and gradually explore the others.
Funds based on market capitalization are best suited for beginners. Sectoral and Thematic can be added whenever you feel ready to expand your portfolio. We would recommend starting a SIP.
For further guidance on investment options and portfolio management, contact VNN Wealth experts today.
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