Equity mutual funds are one of the best investment options for generating long-term wealth in India. With the power of equity investments and the benefits of professional fund management, equity funds allow investors to grow their money substantially over time. This article explores how equity funds work, their types, benefits, and top funds to help readers understand their immense potential for wealth creation.
What are equity mutual funds?
Equity mutual funds invest primarily in shares of companies across different sectors and market capitalisations. Based on their investment strategy and portfolio composition, these funds aim to generate higher returns than fixed-income investments like bank FDs, bonds, debt funds, etc. However, they carry higher volatility as compared to debt investments.
When you invest in a mutual fund, your money is pooled with that of other investors and invested across a basket of stocks by a fund manager. The gains or losses from the underlying stocks are reflected in the fund’s net asset value (NAV) daily. The NAV per unit is the value of the total assets of the fund minus its liabilities divided by the total number of units the fund holds. So, when stock prices rise, the NAV goes up, and vice versa. As an investor, you own units of the fund based on your investment amount and the current NAV.
Types of equity funds
There are several categories and subclasses of equity funds to match various investment objectives:
- Large-cap funds
These funds invest predominantly in large well-established companies with over a Rs 20,000 crore market cap. They provide stability but moderate growth.
- Mid-cap & small-cap funds
These funds invest in medium and small-cap companies with higher growth potential but also higher volatility.
- Sector & thematic funds
Sector & thematic funds are focused on specific sectors like IT, pharma, FMCG, or themes like rural India, consumption, infrastructure, etc.
- ELSS funds
. ELSS funds have a tax benefit under Section 80C but require a 3-year lock-in.
- Index funds & ETFs
These funds mimic and track major indices like Nifty or Sensex. ETFs are similar to index funds but are traded on exchanges.
Key benefits of equity funds
Here are some of the key benefits of investing in equity funds:
- Professional management: Fund managers have the expertise to pick stocks across market caps and sectors to create a well-diversified portfolio. This can be hard for retail investors to replicate on their own.
- Diversification: Equity funds invest across many stocks and sectors to reduce volatility and risk. This kind of diversification requires large capital which individual investors may lack.
- Liquidity: Open-ended funds allow easy liquidity. You can redeem your investments any time at the prevailing NAVs unlike direct stocks which may have limited buyers.
- Low costs: Equity funds have economies of scale which bring down costs like brokerage, custody, operations etc. compared to direct stock investing.
- SIP investing: Systematic investment plans (SIPs) allow rupee cost averaging by investing small periodic amounts. This evens out market volatility over the long term.
- Potentially higher returns: Equity as an asset class has historically delivered higher inflation-beating returns of 12-15% over long durations of 10-20 years as compared to traditional investment options.
Equity funds offer retail investors the power of equity markets along with the benefits of diversification, liquidity, and professional management. By investing systematically over long periods, equity funds have the potential to deliver inflation-beating returns of 12-15% and help you achieve your life’s financial goals. So, choose your investments prudently, stay invested, and let the power of compounding grow your wealth.