Equity Funds

Investing in equity funds can help you accumulate a substantial corpus through market-linked returns in the long term. You should note that profitability from equity funds is subject to market performance, and the investor solely bears the risk. Therefore, if you are averse to risks, you should look at fixed return investment options such as FDs. However, if you are looking for increased returns on your investments, equity funds are the way forward.

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Best ULIP Funds - Consider the best performing ULIP funds to invest in 2024 with Policybazaar. Find the list of best ULIP funds in India on the basis of Returns, Latest Nav, Fund Size and Categories

Data source : value research

Returns as on 17-05-2024. The returns are the returns of best-performing fund in the plan

What Are Equity Funds?

An equity fund is a type of investment wherein funds are that primarily invested in stocks/shares of a company. The returns from these funds depend significantly on the company’s performance and are therefore favored mainly by those with a penchant for risk. Despite this, young and budding investors are increasingly investing in equity funds, given the potential to earn the highest returns among all other investment avenues.

SIPs versus Lump Sum Investment

You can choose to invest in equity funds through a Systematic Investment Plan (or SIP) or as a lump sum amount. SIPs require you to invest a fixed sum periodically, making it affordable for the younger working class to invest in the equity market and earn high returns. It also offers the benefit of rupee cost averaging that allows investments at different levels of the market for the same price. With SIP, investors are basically mitigating the risk of market fluctuations. 

How Do Equity Funds Work?

Equity funds pool capital from small investors and invest a majority of it in stocks of companies based on the investment objective and the risk profile. In equity investments, at least 60% of the asset allocation is made purely in the stocks of companies with varying market capitalization. The remaining amount is invested into debt securities or other market-linked instruments. The profits and the losses incurred on your fund are reflected in the fund’s net asset value (NAV), which you can regularly monitor. 

A fund manager is generally involved in asset allocation and is responsible for evaluating the market conditions and investing accordingly. The fund manager balances the risk by taking advantage of the capital momentum in the market to reap maximum returns. 

Types of Equity Funds

Equity funds can be classified based on the following aspects:

Market Capitalization: The investment objective in the case of equity funds is mostly capital appreciation. This refers to the increase in the value of your investment, which subsequently earns you high returns. 

Now, the risk that you undertake to fulfill this objective depends on the market capitalization of the company that you choose to invest in. The larger the market cap of the company, the lower are the risks associated with investing in its equities. The choice of equity funds are:

Type of Equity Fund Description
Large-cap Funds
(lower risk, stable returns)
These funds invest in companies with the largest market capitalization, typically ranking in the top 100 (as per SEBI guidelines). 
Mid-cap Funds
(more volatile, higher returns)
These funds invest in equities of companies ranking between 101-250 per their market capitalization. 
Large & Mid-cap Funds
(moderate risk, high returns)
Funds allocation is divided between large-cap and mid-cap companies. 
Small-cap Funds
(Highest risk, highest returns)
These equity funds invest in the shares of companies ranking above 250 per their market capitalization. 
Multi-cap Funds These equity funds invest in the shares of companies across all types of market capitalization. The fund manager, who, upon evaluation of the market condition, decides which companies to invest in.

Investment Strategy: There are broadly 4 strategies, viz. top-down strategy, bottom-up strategy, growth strategy, and value strategy, that investors adopt to choose the companies they want to invest in. Based on the chosen strategy, equity funds can be categorized as: 

Type of Equity Fund Description
Sector Funds and Thematic Equity Funds
  • The top-down strategy employs these kinds of equity funds, wherein a particular sector/industry is chosen first and then companies with the best-listed stocks within the industry are invested in. 
  • Sector Funds are invested in stocks within specific industries such as pharma, banking, IT, etc. 
  • Thematic funds are invested in stocks within specific subjects such as PSUs, emerging consumer companies, international stocks, etc.
  • Funds can be diversified to balance risk based on the further market cap of the companies within the chosen sector. 
Equity Income Funds
  • These funds employ a bottom-up approach, wherein funds are invested in equities of companies that pay out a dividend, irrespective of the sector. 
  • The investor earns a share of ownership in the company, and thereby, receives income in addition to capital growth.
Growth Funds Growth equity funds are invested in the shares of companies that have a track record of performing well and are expected to continue showing similar profitability patterns. 
Value Funds These equity funds invest in undervalued stocks but those that are expected to grow and perform significantly better in the future.  

Tax Savings: All equity funds except Equity-Linked Savings Scheme (ELSS) are subject to taxation per the capital gains earned in a year. As per the Union Budget 2022-23, short-term capital gains (STCG) from equity funds are taxable at 15%, and long-term capital gains (LTCG) at 10%.  

Equity-Linked Savings Scheme (ELSS) is a tax-saving investment vehicle that allocates nearly 80% of the assets in equities and equity-related schemes. Investors can claim tax benefits under section 80C of the Income Tax Act, 1961. 

People Also Read: Sip Calculator

How To Choose An Equity Fund?

Given the large number of equity funds available in the market today, choosing one can be a struggle especially if you are new to this. It is recommended that you evaluate your financial goals, risk appetite, and investment horizon. Note that equity funds generate good returns only in the longer term, taking time to combat market fluctuations and volatility. Therefore, you should be ready to commit to a fund for at least 5-10 years. Here’s how you should go about investing in equity funds for consistent returns.

  1. Investment Expertise

    If you just started on your investment journey, you should start by investing in large-cap equity funds which guarantee stable returns over the years. Since funds are invested in well-established and top-performing companies, the risk of investment is lower. Once you are more versed with the concept, you can choose to diversify your investment portfolio. 

  2. Risk Appetite

    A lot of people are jumping into high-risk investments anticipating huge profits without research. As such, people end up losing a lot of their money. Make sure to balance out your risks with a diversified investment portfolio. This will help you earn consistent capital returns from large-cap funds while also offsetting the risk of losing money from volatile funds.

  3. Fund Performance

    Before investing, choose the funds you wish to invest in after looking through their NAV. It is an important indicator of how well a fund is performing in the market. Investors must monitor their funds’ performance and make systematic adjustments in their portfolio to avoid incurring major losses. Check the track record of the fund house, ideally with significant assets under management (AUM). 

  4. Expense Ratio

    It is the fee charged by the Asset Management Company (AMC) to manage your funds. The fund with a lower expense ratio ensures higher returns for investors. The Securities and Exchange Board of India (SEBI) has capped the expense ratio for equity funds at 2.5%. 

  5. Age of the investor

    If you are a young investor with a long-term financial goal, you can benefit from the power of compounding. Power of compounding means that the profits earned are added into the initial investment sum and then the entire sum is reinvested to accelerate wealth accumulation. This only shows high returns in the longer term, which is why it is advisable to invest when you are young. If you are nearing retirement, you can choose an aggressive hybrid investment comprising of equity and debt funds to generate high returns in a short period of time. 

Is Equity Fund A Good Investment?

Equity funds are considered a good investment instrument, given the returns and the balanced risk profile. These are especially ideal for investors without a financial background or for those who want to invest systematically in fixed amounts. Another popular attribute of equity funds is the potential to diversify funds to lower risks. Diversification of funds ensures that the negative movement of an individual stock does not affect the overall investment portfolio. 

Benefits Of Investing In Equity Funds

  • Funds are professionally managed by financial experts who carefully invest in stocks that have the potential to generate optimal returns for investors. 

  • Systematic investment in equity funds ensures that you do not have to shell out a huge sum to enjoy the benefits of high-risk, high-return investments.

  • The capital growth is significant to plan retirement and other long-term financial goals of investors. The power of compounding factors in to generate accelerated returns.

  • Investors are given the option to switch between funds should they see their funds underperforming. 

Summing Up!

Equity funds in India have been performing in tandem with the market changes. Average returns from equity funds in India stand at around 10-12%. Note that this figure varies according to market conditions. It is important that you choose a fund that has shown consistent performance over the years. This will ensure healthy returns on your investments.

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
Tax benefit is subject to changes in tax laws
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^The tax benefits under Section 80C allow a deduction of up to ?1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ?2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.


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