Wednesday, January 12, 2022

What is an Equity Mutal Fund?

As an investor one has to deal with so many financial and investment jargon which often seem to be similar and confusing. The same is the case with the different types of mutual funds available in the market.

There are different types of mutual funds such equity funds, debt funds, balanced fund and hybrid funds etc. These funds have different nature and are suitable for different class of investors. The following sections will deal with Equity Mutual Fund.

What is an Equity Mutual Fund?

Basically an equity fund is a type of mutual fund scheme which invests predominantly in equity stocks. These funds pool the money of its subscribers to invest a major part of the pool in equity shares and rest of the money is invested in different classes of assets.

In India, the SEBI regulates the mutual funds industry. As per the definition given by the SEBI, an equity mutual fund scheme must invest at least 65% of the scheme’s assets in equities and equity related instruments. Rest of the corpus can be invested in other classes of assets.

As per the Income Tax Act, certain equity mutual funds enjoy tax advantages. As per the Income Tax rules, an "Equity Oriented Fund" is the mutual fund scheme which invests its investible funds in equity shares of domestic companies in tune of more than 65% of the total corpus of the scheme.

Management of Equity Mutual Funds

An Equity Fund is either actively managed or passively managed. Most of the equity funds are actively managed however, index funds and ETFs are passively managed.

These equity funds are managed by experienced fund managers who focuses on bringing down the risk while increasing return.

Pricing of Equity Mutual Funds

The price of the equity mutual fund is based on the net asset value (NAV) minus its liabilities. The investors in equity funds buy and sell their investments on the NAV.

Who Should Invest in Equity Funds?

Equity funds are best option for the investors who are not well-versed in equity investment but wants to invest for long term goals with high expected returns. Equity mutual funds are less risky than the equity investment because of portfolio diversification.

Equity funds are best suited for the young investors who have longer time horizon to enjoy the benefit of rupee cost averaging. For young investors, systematic investment plans (SIP) are considered to be the best method of investment over a long period of time.

Types of Equity Mutual Funds

Equity mutual funds are principally categorized according to the investment style of the holdings in the portfolio (size of company, diversification), geography and tax benefits. Some equity funds invest into specific business sectors, such as health care, commodities and real estate. Such funds are known as Sectoral Funds.

The different types of equity mutual fund schemes:
  • Large Cap Equity Funds
  • Mid-Cap Equity Funds
  • Small Cap Funds
  • Multi Cap Equity Funds or Diversified Equity Funds
  • Thematic Equity Funds
  • Equity Linked Savings Scheme (ELSS)

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