Equity funds are popular with young professionals because they can help them accumulate wealth over time. Providing you with capital appreciation in the long term is the primary objective of these funds. Invest approximately 65% of assets in equities and related instruments for an equity fund investment. You need to have a high-risk appetite to invest in equity funds.
How do equity funds work?
An equity mutual fund invests approximately 60% of its assets in the equity shares of different companies in varying proportions based on the investment objective. The returns from an equity fund investment depend on the equity market performance. The rest is allocated to money market instruments and debt to mitigate risks.
What are the features of equity funds?
Here are a few salient features associated with these funds:
- They are risky:
It is important to remember that equity funds are volatile. Hence, the returns on these funds depend on the condition of the equity market. A high-risk appetite is a must for an equity fund investment.
- They are not a monolith:
There are three types of equity funds based on the market capitalisation of a business. These types are large-, mid-, and small-cap funds. Large-cap funds involve businesses that have the largest market capitalisation. They are known for offering relatively stable returns. Mid-cap businesses have a lesser market capitalisation. They generate higher returns in comparison to large-cap funds. Small-cap businesses are not a part of the top 250 companies on the stock market. An advantage of small-cap funds is that they offer high returns. But please remember that small-cap funds are risky.
- Suitable for long-term goals:
Do not sign up for an equity fund if you want to redeem your investment soon. These funds are ideal for long-term investments building a retirement corpus, or saving for a college education. You must be willing to stay invested for the long-term goals to earn good returns from an equity fund.
Now that you know what these funds are and their features, let us look at reasons you should consider signing up for equity funds.
What are the benefits of equity funds?
Listed below are a few reasons you must consider signing up for an equity mutual fund:
- Professional management:
You are not required to manage your mutual fund portfolio personally. The fund manager is responsible for the upkeep of the portfolio. These managers thoroughly research the market trends to outperform the benchmark indices. Generating higher returns than the market indices is the fund manager’s job.
- Fund diversification:
Your funds are diversified to different sectors and other asset classes. You can enjoy the benefits when all the assets perform well. Simultaneously, diversification reduces the risks and balances the investment portfolio. Diversification ensures that even when one asset underperforms, you need not panic because the others might be performing well. Fund diversification reduces the overall loss incurred.
- Wealth Creation:
Equity funds also offer higher returns than other types of mutual fund investments. They offer inflation-beating returns that help in building a good retirement corpus. You should sign up for an equity fund if you have long-term goals of capital generation. Despite the risk, their performance can bounce back if you hold on to them for long.
- SEBI regulation:
The Securities and Exchange Board of India (SEBI) formulates the norms for mutual funds, and asset management companies (AMCs) must follow them. AMCs should release statements of all their mutual funds according to the SEBI rules.
Conclusion:
Your decision to sign up for any mutual fund depends on your investment goals, horizon, and risk tolerance. An equity fund can help in accumulating wealth in the long term. But for that, you must have two things if you are choosing an equity mutual fund. You must have a long investment horizon and a high-risk appetite.
