Equity mutual funds are the types of mutual fund schemes that essentially invest in the stocks of companies that are traded publicly. This is done by pooling the money from investors and investing in the stocks of these businesses. The objective of all equity funds is to seek out opportunities to invest in a business that will grow and yield profits for its shareholders.
You should opt to invest in equity mutual funds only after aligning with your risk profile, investment horizon, and objectives. Usually, it is better to invest in equity funds if you have a long term goal of 5 years or more. It will also provide enough time for the fund to tackle market fluctuations.
How to Invest in Equity Funds?
Equity fund investment may be as simple as giving your money to a mutual fund to invest in equity stocks but it is always better to have a sound knowledge of some of the technicalities as it will always help you to select the best funds.
Investment Objective: First and foremost, equity funds might not be suitable for all investors. There are a number of equity funds categorized by their investment objective which needs to be aligned with your risk profile.
Though the investment objective of almost all equity funds is wealth creation, it is the risk taken to achieve this objective that varies. Therefore, understanding your risk capacity and tolerance play a pivotal role. This further depends upon the nature of the stocks that the fund would invest in.
Fulfill the KYC (Know Your Customer) requirements
In order to start investing in a mutual fund, investors need to adhere to the KYC guidelines. Tpo fulfil this, the investor needs to submit copies of Permanent Account Number (PAN) card, Proof of Residence, age proof, etc. as required by the fund house.
Investment Strategy or Style
An investor should always be aware of the investment strategy followed by the fund house, which means the methodology adapted for selecting stocks. Investment strategies are primarily categorized into top-down strategy, bottom-up strategy, value strategy, and growth strategy.
i) Top-down strategy – Under this strategy, the sector is chosen first and then the best stocks within that sector are purchased in the portfolio.
ii) Bottom-up strategy – This strategy means buying well-researched stocks irrespective of the sector.
iii) Growth Strategy – Investing in companies which have a consistent past record of consistent profitability and growth, and are likely to grow in the future
iv) Value Strategy – Under this strategy, the fund invests in companies that have the potential to grow exponentially in the future and are currently available at a lower value.
Once you identify your risk profile and investment strategy, you should practice dividing your money between various asset classes. Most equity funds are usually fully invested in equities, however, there are a few, which may divide the capital between predominantly equity (at least 65%) and the rest in debt or between domestic and international equity.
An ideal asset allocation should have a mix of both equity and debt instruments in order to balance out the risks.
Equity mutual funds investment comes with a charge and also, while investing in any mutual fund scheme, investors are charged more than those who invest in other asset classes. In short, the riskier the asset class, the higher are the charges. For example, equity funds will have higher charges compared to debt funds.
These charges, cumulatively are denoted by a term called ‘Expense Ratio’ which is in simple words charges levied for the cost of running the mutual fund scheme such as brokerage cost, marketing, administrative cost, distribution cost, commissions, investment management charges, service tax (if any), investor education charges, among others.
Some funds even with a similar objective may have different expense ratios depending upon their AUM and actual costs incurred to manage the scheme in a seamless manner.
The expense ratio also varies even within equity funds, depending on whether the funds are actively or passively managed. Passively managed equity funds have a lower expense ratio than actively managed equity funds.
Know about the Mutual Fund schemes available
The mutual fund market is always brimmed with options. There are multiple schemes to cater to almost all the needs of the investor. Before investing, make sure you have done your homework by exploring the market thoroughly to get the hang of the different types of schemes available and how to choose the best equity mutual funds. Once you are fully assured, align it with your investment objective, your risk appetite, your affordability, and see what comes up to be the best fit for you. If in doubt, seek the help of a financial advisor as it is always best to get an expert’s opinion. At the end of the day, it is your hard-earned money. You need to ensure that it is used judiciously to fetch maximum returns.
On a closing note
In a nutshell, equity mutual funds are no different than other mutual fund schemes and pool your money to invest in equity stocks after thorough research. However, it is imperative to understand the basics of how equity funds work. This starts right from knowing the objective of the equity fund and aligning with your risk profile. The next thing to keep in mind is the asset allocation of the fund followed by the investment strategy. Lastly, you should also be aware of the expense ratio as it plays a great role when it comes to returns.
Afroz is a business reporter at GetIgnite with a focus on regulators, lawmakers, and institutions. He was previously a news, science, technology and community reporter and editor with The Daily Targum. His work has been featured in The Nation and referenced by The Washington Post, ZDNet, Gizmodo, NJ Advance Media, and The Philadelphia Inquirer.