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What is Equity Mutual Funds: Meaning, Types & Benefits

If you intend to invest your money to create higher returns for future and unforeseen events? Equity mutual funds may be what you are seeking.

  • Feb 20, 2023
  • 1,544 Views

Since their establishment, equity mutual funds have become a favoured investment vehicle for many individuals. Due to the vast number of accessible possibilities, selecting the focused equity funds strategy might be challenging. Moreover, investing involves a cautious and well-considered strategy to prevent potential losses. Therefore, it is essential to comprehend the fundamentals of the many types of accessible plans.

Key Takeaways

The primary types of Equity-Oriented Mutual Funds are as follows:
Equity Funds are hybrid mutual fund schemes with investments in various stocks of firms under the investment goal of the underlying scheme. They are mutual fund schemes that invest in the equities of various corporations. Equity hybrid funds are excellent investing alternatives.

  • Large Cap Funds
  • Mid Cap Funds
  • Large and Mid Cap Funds
  • Small Cap Funds
  • Multi Cap Funds

Here, we will investigate equity mutual funds and discuss the many types of equity funds, their benefits and more.

What are Equity Mutual Funds?

Mutual funds investing primarily in equity stocks are known as “Equity Mutual Funds”. These funds have the potential to create long-term wealth, making them an excellent investment alternative for capital appreciation. Equity-oriented mutual funds are a great option for long-term investors who wish to get their feet wet in the stock market.

Types of Equity Mutual Funds

Investors can invest in a range of hybrid mutual funds. The choice of the plan should be determined by the investor’s investment aim, risk profile, and investment horizon. The broad classes of equity funds include:

Large Cap Funds

Significant Size Funds invest at least 80% of their total assets in the stock of large-cap firms (top 100 companies in market capitalization). In addition, they invest in well-established businesses with a track record of success. As a result, these funds can provide decent returns and are far less volatile than mid-cap and small-company funds.

Mid Cap Funds

A minimum of 65% of the assets of Mid Cap Funds are invested in equity shares of mid-cap corporations (101-250 companies in market capitalization). As a result, they are more volatile than large-cap funds, but they have the potential to provide superior returns.

Large and Mid-Capitalization Funds

Big and Mid Cap Funds invest a minimum of 35% of their assets in both large-size (top 100 firms based on market capitalization) and mid-cap enterprises (101-250 companies in terms of market capitalization). The remaining 30% of the assets may be invested in shares other than big and mid-size, debt and money market instruments and other SEBI-approved securities.

Small Cap Funds

Small Cap Funds must invest at least 65% of the total assets in equity shares of small-cap firms (251 and above companies in terms of market capitalization). As a result, these funds have the potential to provide reasonable returns but are more volatile than large- and mid-cap funds.

Multi Cap Funds

Multi Cap funds invest in Large Cap, Mid Cap, and Small Cap firms according to market conditions. This affords investors the possibility to invest in a market-capitalization-diversified portfolio.

Benefits of Equity Mutual Funds

Mentioned below are the key advantages of equity hybrid funds.

Diversification

Equity funds allow investors to spread their money across various industries. Investments can be made regardless of a company’s market valuation. Since the underperformance of certain stocks might be compensated by the outperformance of other stocks, the overall risk is reduced compared to investing directly in equities.

Actual Returns to Inflation

Inflation-adjusted returns on equity funds may be higher than those on more conventional investment vehicles. As a result, those who put their money into equity funds have a chance at a reasonable return on their money over the long run.

Superb Administration

Professional fund managers oversee equity funds, analysing the market for investment possibilities and working to minimise risk. Because of this, equity funds are a viable choice for anyone seeking entry into the stock market.

Positive Tax Consequences

Section 80C of the Income Tax Act allows for tax breaks of up to ₹1,50,000 (For Individuals and HUF) for investments in ELSS (Equity Linked Savings Scheme). In addition, the three-year commitment period makes it one of the shortest lock-in periods for tax planning tools.

Convenience

You may quickly invest, redeem, or transfer your units to another plan by setting up a SIP (Systematic Investment Plan), SWP (Systematic Withdrawal Plan), or STP (Systematic Transfer Plan).

Did You Know?

Money market products such as Treasury Bills, Commercial Papers, Certificates of Deposit, Collateral Borrowing & Lending Obligation, etc., are purchased by mutual funds to diversify their holdings in the stock and bond markets. Due to these products’ high minimum order size, they are not often available to individual investors. However, retail investors can still have exposure to these assets through mutual fund schemes.

Conclusion

Focused equity funds are a solid investment choice for individuals who are looking for long-term wealth appreciation through exposure to the equity market. This may be accomplished through investing in equities. When compared to traditional savings vehicles, they have the ability to offer returns that are respectable after taking into account the consequences of inflation.

In this policy, the investment risk in the investment portfolio is borne by the policyholder.

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