So you’ve finally decided to start your mutual fund investment journey. As you explore your options, you will find that the MF market has something to offer to every investor – risk-loving, risk-averse, short-term, long-term, and more. But, if you’re wondering if equity funds are the ideal pick for your investment portfolio, this guide will help you decide.
What are equity mutual funds?
These funds invest a predominant share of their assets, as much as 60%, in stocks of companies. As a result, the companies’ performance in which the funds are invested plays a key role in determining returns. They are often broadly described as ‘risky’, but that’s just half the truth. With equity funds, it is the investment horizon that you need to pay attention to. If you stay invested for the long-term, you can build a healthy corpus.
• Risk factor
The risk factor ranges from high to moderate, but it all boils down to risk diversification and portfolio rebalancing. Ensure that you spread the risk over a mix of equity, debt, and alternative market instruments. Also, sell and buy units from time to time to always maintain desirable asset allocation levels, and you have nothing to fear.
• Ticket size
Building a balanced portfolio can prove to be pricey. If you cannot afford to pay a lumpsum, simply opt for the monthly Systematic Investments Plans or SIP. You can start your investment journey with just Rs. 500 per month.
• Investment horizon
The equity market is highly volatile in the short run. However, the probability of being affected by market turbulence significantly reduces in the long run. These funds are ideal for investment goals like retirement planning, building an education corpus, etc.
Additional Read: Mutual Fund Trends to keep an eye on in 2021
Types of equity funds
Based on market capitalisation
- Large cap funds – invest in stocks of top 100 companies. Since the companies hold significant market share and enjoy a good reputation, these funds are the least risky.
- Mid cap funds – invest in companies ranking between 101 and 250. Though riskier than large cap funds, mid cap funds offer higher earning potential.
- Small cap funds – invest in start-ups or small companies that rank from 251 or below. The earning potential is extremely high, and so is the risk factor.
Based on investment style
- Thematic or sectoral funds – invest at least 80% of their assets in a particular theme or sector, as per the SEBI mandate. These equity mutual funds are usually added to the portfolio to augment returns.
- Dividend yield funds – invest predominantly in high yielding dividend stocks. Meaning, stocks of companies with stable cash flows and business models. Hence, they are a low-risk option.
Based on tax efficiency
ELSS, short for Equity Linked Savings Scheme, are the only tax-saving funds, and they are equity-oriented. Income Tax Act’s Section 80C allows tax exemptions on up to Rs. 1.5 lakhs of your yearly taxable income. You can save up to Rs. 46,800 with these funds.
Additional Read: Direct Equity vs. Equity Mutual Funds: Which should be preferred?
Over to you
Want to know about the best equity mutual funds available today? Compare between funds on Tata Capital’s Moneyfy app. See our top picks, match the fund features with your investment goals, and build a balanced portfolio. Start investing in the equity market from the comfort of your home!