A Complete Guide to Investing in Equity Mutual Funds in 2020

Get started with Equity Mutual Funds

If you are not comfortable with direct equity investment but still want to participate in the market rally, equity mutual funds can be an excellent choice. Read this post to understand the basics of equity funds.

With the Indian economy on its way to recovery, 2020 promises to be a year that is excellent for investing in the equity markets. But most investors avoid equity investing due to the volatile nature of the market. They do not have the experience or knowledge to pick quality stocks that can deliver significant returns.

If you can relate to this but still want to participate in the market rally, equity fund investment can be a wise choice for you. Take a look at what these funds are, how they work, categorisation, and more.

What are Equity Mutual Funds?

Equity mutual funds are a type of mutual funds that invest majorly into equity and equity-oriented instruments. Equity funds must invest at least 65% of its portfolio in equity. This eliminates the need for investors to invest in the equity markets directly.

Each equity fund has a fund manager and a research team responsible for handling the investments of investors like you. They continuously search for investment opportunities that can help them generate higher returns.

Types of Equity Funds Based on Market Capitalisation

To invest in equity funds, you first need to understand the types of funds currently available in the market. When categorised based on the market cap, the funds can be divided into three broad categories. Let us understand this categorisation better.

Type of Equity Fund Investment Portfolio Risk/Reward
Large-Cap Mutual Fund Invests in top 100 companies with the largest market capitalization Low/Limited
Mid-Cap Mutual Fund Invests in 101st to 250th exchange-listed companies based on market capitalization Moderate/Moderate
Small-Cap Mutual Fund Invests in companies below the 250th spot based on capitalization High/High

Other Types of Equity Mutual Funds

  • Diversified Equity Funds-

    These funds invest your money in companies across market capitalisations So, it is a combination of large-cap, mid-cap, and small-cap companies.

  • ELSS -

    Equity-Linked Savings Scheme is the only equity fund eligible for tax deduction under Section 80C of the IT Act. These are equity-oriented diversified funds with at least 65% investments in equity.

  • Index Funds-

    The index funds mimic an underlying benchmark, like Sensex or Nifty. Their portfolio composition is similar to the benchmark they follow.

  • Thematic Funds-

    These funds follow a specific investment theme, such as energy, infrastructure, oil and gas, and more. They will only invest in companies and sectors related to their theme.

  • Sectoral Funds-

    While thematic funds follow a specific theme and then invest in multiple sectors related to the theme, sectoral funds invest sectors like IT, FMCG, banking, etc.

What are Regular and Direct Options in Equity Funds?

You can invest in equity funds online by visiting the official website of the fund house. You can also visit the nearest branch office of the fund house to start investing. So, when you invest directly through the fund house, you invest in the Direct (D) option of the selected equity scheme.

But if there is an intermediary, like a mutual fund distributor, broker, 3rd party website, or 3rd party mobile app between you and the fund house, you will invest in the Regular (R) version of the same scheme.

Regular and Direct are two versions of the same scheme. When an intermediary is involved, the fund house pays a commission from the NAV of the scheme. This is the reason why equity schemes have two NAVs- one for Regular and other for Direct schemes. NAV of Regular scheme is lower than that of Direct schemes. In the longer-run, Direct schemes are known to generate higher returns.

Who Should Invest in Equity Mutual Funds?

Equity investment is a long-term investment. So, no matter if you directly purchase stocks or go the mutual fund way, it is only recommended if you have a long investment horizon of at least 3-5 years and above.

Also, as compared to other mutual fund categories, pure equity funds have the highest level of risk. So, avoid them if you are a risk-averse investor. If this is the first time that you are planning to invest in equity funds, do consider professional help. Rather than making a lump sum investment, you can start a SIP in the equity fund of your choice if you are new to mutual funds.

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