While investing in equities, you have to consider many factors like industry, sector, size and structure of the company and the track record of the management. You will also have to take into consideration the macro-economic conditions while assessing the potential of the stock you wish to invest in. All these can make investing in equities a complex task for a new investor without much experience and expertise. So, it would be always advisable to opt for professionally managed equity investment rather than direct stock investment to enhance the value of your investments. And one such option is to invest in Equity mutual funds or Growth Funds.
What are equity funds?
Equity funds are mutual funds that invest fundamentally in stocks. These funds invest at least 65% of the funds’ corpus in equity and equity-oriented securities. The remainder is invested in debt and money-market securities. Let’s look at the three broad classifications of equity funds based on their investment strategies.
· Diversified equity fund: Diversified funds based on market caps-large cap, large and mid, mid and small cap etc
· Sector-specific equity funds. These funds provide you with the maximum exposure to stocks of a specific sector. For instance, if you seek to invest in an industry or sector such as pharmaceuticals, banking, automobiles, FMCG etc., you may want to invest in sector funds. If you have a high-risk appetite, investing in such funds could be ideal for the long run.
· Index funds. These funds imitate the portfolio of the index it follows. It means that the funds mimic a specific stock market index. These funds aim to help generate returns the same as that of the index. Regarded as passive funds, index fund managers do not actively pick specific segments to invest in the corpus. Since these funds passively mimic an index, they could be less risky than an active fund. Hence, if index funds appeal to you, you may want to invest in them and stay invested for the long term to earn good returns.
· Tax-saving funds. Equity Linked Savings Scheme [ELSS], also popularly known as tax-saving funds, are equity funds that allow you to claim tax deductions. In addition to the tax benefits that equity schemes enjoy on long-term capital appreciation, you can also claim tax deductions of up to ₹1.5 lakhs, according to Section 80C of The Income Tax Act, on the invested amount in a financial year. These funds come in with a brief lock-in period of three years and can give you the potential of earning high returns if you stay invested for an extended period.
Investing in an equity fund can be ideal if you are not well-versed in the stock market. Additionally, these funds also do not require you to invest a large amount of capital. And hence, they make worthwhile investments. But because there’s an equity fund for everyone, choosing the right one can be overwhelming. To find out which equity funds can work best for your goals, risk profile and time horizon, consult an experienced financial professional.
