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A mutual fund is an intermediary that collects funds from investors in small units and then invests them in assets that appreciate over time. An equity fund is a class of mutual fund that invests the corpus in listed equities in the stock markets. An equity fund is defined under the Income Tax Act as any fund that has a minimum exposure of 65% to equities. Therefore equity funds, index funds, sector funds, balanced funds (with 65% equity) and even arbitrage funds will be classified as equity funds for this purpose.
An equity fund offers investors the facility to participate in a diversified portfolio of equities with minimal risk and with the power of professional management. There is a rigorous process that goes into an equity fund investment. The fund manager checks the research ideas from the brokers and the sales traders. Then the fund runs its own due diligence with its in-house team. Finally, the fund managers also run their market intelligence checks to take a final view on the stock based on research inputs, market liquidity, news flows etc.
An equity fund offers three principal benefits to investors which include liquidity, diversification and professional management. The challenge in direct equities is that investors need to understand the stock and the plethora of factors that impact the stock. Above all, most investors have limited resources and hence they can only take exposure to few shares. This results in concentration risk. Mutual funds create a diversified portfolio and one can invest with as small a corpus as Rs.5,000 or even do a monthly SIP with just Rs.500. By buying units into a diversified equity fund portfolio, the equity fund investor automatically gets the benefit of professional management, liquidity and diversification.
Equity funds come in various categories and even the basis for classification of these funds differs. Firstly, equity funds can be classified into open ended funds and closed ended funds.
Open ended funds: These are available for purchase and redemption on all trading days at the previous day’s net asset value (NAV). The corpus of the open ended equity fund keeps constantly changing.
Closed ended funds: Unlike open ended funds, these funds are not available on tap. They come out with NFOs and then the fresh purchase and sales are halted. Such closed ended funds are listed on the stock exchange so there is liquidity in the form of secondary listing. But closed ended funds normally trade at a discount and that is your cost as an investor.
Equity funds can also be looked in terms of their portfolio mix. The definition of an equity fund is a fund that has minimum 65% exposure to equities. Here are some of the popular classifications of equity funds based on their portfolio.
Any investor looking to create wealth in the long-term should invest in equity funds. Young investors who are embarking on their careers should use equity funds as a veritable means of creating wealth in the long run. Any investor who has a monthly surplus must look at taking a systematic approach to investing in mutual funds via SIPs. These SIPs not only give the benefit of rupee cost averaging but also sync with your income flows. Even middle aged investors with a 6-10 year perspective should look at equity funds as a serious asset class.
Should businesses also invest in equity funds? Normally, we see large businesses parking their treasury surpluses in debt funds or in liquid funds. Every business needs to create wealth in the long run. Investing in equity funds not only enhances wealth but also gives the business a diversification from their core business. This is more so for small and medium business where the cash flows are comfortable.
There are a variety of reasons for you to invest in equity funds. An equity fund normally represents a diversified portfolio wherein you can buy proportionate units.
Investing in a mutual fund can be quite complex as there are nearly 40 AMCs, hundreds of fund schemes and thousands of unique offerings if you factor in the growth plans, dividend plans, direct plans, regular plans, reinvestment plans etc. Here is what you need to consider before investing in equity funds.
There are different ways to invest in mutual funds. Let us look at investing in mutual funds from the point of view of frequency of investing.
Frequency of investing in equity funds
There are different ways to judge the performance of an equity funds. Here are some common ways to judge the performance of equity funds.
It is hard to arrive at benchmark annual returns for equity funds, but we can have benchmarks for a longer time frame. Here is what you need to know.
An asset management is the company that sponsors the fund. For example, HDFC AMC is the asset management company for all the HDFC funds. The asset management company or the AMC manages the day to day operations of the fund, takes all fund management decisions, manages the buying and selling of units through the registrars like Karvy and CAMS and also reports to the Board of trustees and SEBI. Board of trustees is called the conscience keeper of the AMC and it tries to protect the interests of the individual investors. An AMC collects a fee from the fund for these services and is charged as a percentage of the corpus. This cost is called the total expense ratio (TER) and is apportioned to the fund in a daily basis and the NAV is reduced accordingly.
No, returns from mutual funds are not guaranteed. Investors need to remember two things here. Firstly, SEBI regulations do not allow the AMC or the brokers to assure any returns from a mutual fund. It has to be clearly specified to the investors that mutual funds are subject to market risks. Secondly, equity markets being volatile, it is not practically possible to assure returns of any kind. The best that investors can do is to rely on the past performance of the fund and use that as a benchmark. Having said that; it needs to be remembered that such returns are only indicative and cannot be construed as a guarantee of returns of any kind.