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Equity Fund Investments – A Detailed Guide

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By Author: Shashank Bhaskar
Total Articles: 13
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Many novice and seasoned investors rely on mutual fund to generate an additional source of income and create a corpus in the long term. This is one of those rare market investment instruments that suit both, conservative investors with low risk appetites and investors who are not afraid of taking risks. One of the most popular types of mutual fund investments is an equity mutual fund. Here is a detailed guide on this type of mutual fund.

Equity based fund – meaning and definition

Equity fund is a type of mutual fund which aims to generate high returns on investment. The fund manager of an equity-based fund typically invests in shares of different companies of varied market capitalisation. These funds have the potential to produce higher returns than traditional investment instruments; fixed deposits for instance. They can even provide better returns when compared to debt funds, which is another type of mutual fund, ideal for conservative investors. The returns earned from debt-based fund investments largely depend upon the performance of the company offering the fund.

The working of equity-based funds

Equity linked mutual funds essentially invest a minimum of 60% of assets in equity shares of various companies, in different proportions. This should be as per the investment mandate. The fund manager may invest in purely small-cap, mid-cap or large cap funds or even chose a mixture of different funds to maximise market capitalisation. Also, the investment style of the fund manager could be either growth-oriented or value-oriented.

Allocation of funds

Once the fund manager allocates a significant portion of the equity oriented funds, the remaining amount is used to invest in debt funds and other money market instruments as a portfolio diversification technique. This is done in order to be able to both, honour sudden redemption requests from investors and to mitigate the risks associated with equity investments to a certain extent. Purchase and sales decisions are made by the fund manager in order to make the most of changing market movements as well as to reap maximum, high returns.

Types of equity funds

Equity funds are broadly classified in two categories

Funds based on themes and sectors: These are equity-based funds focusing investments on specific themes and sectors. While thematic funds typically follow a specific theme or subject (for example international stocks or emerging companies), sector funds basically invest in specific industries like Pharma, Technology, FMCG etc. These equity-based funds are comparatively risky because the fund manager has to account for both, market risks as well as sectoral performance. That said, you can easily diversify your investment and maximise market capitalisation by investing in these funds.

Funds based on market capitalisation: Equity savings schemes that invest in funds based on market capitalisation are divided into five categories i.e. large cap, mid-cap, mid and small cap, small cap and multi cap funds. Companies that are well-established and have the ability to provide stable returns on investments are regarded as large cap funds. Mid-sized and mid and small sized funds invest in medium and small sized companies. Small cap funds typically deliver fluctuating returns since small-sized companies are more prone to volatility. A fund that invests across various markets i.e. large, mid and small-cap stocks is referred to a multi-cap fund.

Final word: Investing in equity mutual fund may not be ideal for every investor, but it is not without its benefits. These funds are manged by experts, come with low investment costs and are highly liquid. You can invest in these funds conveniently and even diversify your investment portfolio.

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