What is meant by equity based mutual funds?

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Whether you are a seasoned investor or not, you’ve surely heard of the term ‘equity’. We even use it loosely in non-financial contexts. But here, we’re going to take a look at mutual funds that are equity-based. It’s a category of mutual funds that allows you to invest in the equity market, or the stock market, without needing the expertise or research that a seasoned stock market investor would have.

Equity based mutual funds invest primarily in stocks. You put money into the fund by SIP or lump sum, and it invests it in a variety of equities stocks on your behalf. The resulting profits or losses in the portfolio impact your fund's Net Asset Value (NAV). 

Most new investors are wary of indulging in equity-based mutual funds because of the high risk they entail, and several questions cross their minds. In this piece, we will look at equity-based mutual funds so you can still invest in the stock market but without losing sleep over it. Of course, there are complexities to consider, but this is the essence of investing in equity-based mutual funds.

What Are Equity-based Mutual Funds?

Equity-based mutual funds are one of the numerous mutual fund schemes that invest heavily in equities of publicly traded corporations. It generates more significant returns than debt funds and deposits and is regarded as a high-risk investment in the mutual fund industry. It is difficult to engage time and energy in learning about the ever-changing stock market, so equity mutual funds fill the gap for investors willing to face comparatively larger risks in exchange for better rewards.

In many respects, equity-based mutual funds are perfect investment vehicles for individuals who aren't as knowledgeable about financial investing. For those who can afford to take risks, equity-based mutual funds are considered a viable investment option.

Who Should Invest In Equity-Based Mutual Funds?

Your mutual fund investment selection must align with your investment horizon, risk profile, and other goals. Investing in stock funds is the same way. It is recommended that you invest in equity-based mutual funds if you have a long-term aim, as it will provide your finances the time they need to weather market swings and changes. Long-term equity mutual funds aid wealth building for investors.

If equity-based mutual funds are ideal for you, it is vital to know how they work.

How Do Equity-Based Mutual Funds Work?

Equity-based mutual funds invest significant amounts of their assets in equity shares of various firms in determining percentages. This asset allocation is configured by the type, its performance and the overall investment objective. This can be done entirely in stocks of various enterprises, depending on the conditions of the market.

The remaining funds are invested in debt and other money market instruments after allocating a major part to the equities section. This helps to reduce the risk factor and deal with last-minute redemption requests. 

Before investing, it’s important that you know more about the different types of Equity-Based Mutual Funds:

Equity-based Mutual Funds can be categorised accordingly to the following criteria:

Based on Investment Objective: 

While all equity-based mutual funds have the same goal of capital appreciation, the risk incurred to attain that goal differs. This is also dependent on the equities in which the fund invests. The following are some examples of equity mutual funds depending on their investing goals:

  • Small-cap Equity-Based Mutual Funds:

These equity mutual fund schemes invest in firms that rank above 250 by their full market capitalisation. Their overall asset exposure to such equities must be at least 65 per cent. These funds are regarded as riskier than mid-and large-cap equity funds, although they can provide better returns.

  • Mid-cap Equity Based Mutual Funds:

These equity mutual fund schemes invest in firms that rank between 101 and 250 by their full market capitalisation. Their overall asset exposure to such equities must be at least 65 per cent. These funds are less hazardous than small-cap funds but riskier than large-cap funds.

  • Large-cap Equity-Based Mutual Funds:

These equity mutual fund schemes invest in firms that rank from 1 to 100 by their full market capitalisation. Their overall asset exposure to such equities must be at least 80%. When it comes to equity fund selection, these funds are thought to be the least risky.

Based on Investment Strategy: 

As an investor, you should be aware of the fund house's investment strategy or the approach utilised to choose companies. Top-down strategy, bottom-up strategy, value strategy, and growth strategy are some of the most common investing strategies or types. 

  • Top-down strategy:

This refers to selecting a sector first and then adding stocks from that sector to the portfolio. 

  • Bottom-up approach:

This refers to the purchase of well-researched stocks regardless of sector. 

  • Growth strategy:

This means the fund will put its money into firms that have a track record of profitability and growth and are expected to continue on this path. 

  • Value approach:

This refers to the fund's decision to invest in firms that have the potential to develop tremendously in the future but are now undervalued. 

Based on Asset Allocation: 

According to the regulations of the Income Tax Act of 1961, it is critical to consider asset allocation from a tax-efficiency standpoint. A few funds allocate their portfolios largely to equities (at least 65 per cent) and the balance to debt or local and foreign stock. For tax reasons, international equity funds with a large foreign equity investment are categorised as debt funds. 

ELSS (Equity linked savings scheme):

Equities-Linked Savings Schemes (ELSS funds) are a type of tax-advantaged mutual fund that invests primarily in equity and equity-related securities. The majority of the money invested in this strategy goes into stock, with the balance going into debt-related instruments. As an investor, you also get the option to claim a tax benefit on these investments under section 80C.

Summing it up: 

The wide variety of funds accessible is another fantastic advantage of equity-based mutual funds. Much like the Fi App, where you are presented with a host of investment options, users can choose options that suit their financial goals and risk appetite. Whether it's a specific sector of the market which may include pharma, finance, FMCG companies etc., a specific stock exchange, foreign or domestic markets, income or growth stocks, high or low risk, or a specific interest group, there's something for everyone. Before you go, remember to read all scheme documents carefully before you invest.

Frequently Asked Questions (FAQs)

  • ​​Which mutual fund is best in equity?

The word 'best' is unlikely to provide you with the greatest possible option. Always select an appropriate strategy for your investing purpose, time horizon, and risk profile. You should always seek the advice of a mutual fund adviser if you can’t comprehend fundamental mutual fund ideas or are completely new to mutual funds and investing. 

  • Is it good to invest in equity-based mutual funds?

Equity-based mutual funds are regarded as one of the most viable investment options, especially for long term goals. Given the stock market's volatility, the fluctuations can be voided by indulging in long-term equity mutual funds.

  • What is an example of equity-based mutual funds?

Index funds are equity funds that track a certain index, such as the Sensex. These are index funds that are passively managed and invest in the same firms in the same amounts as the index they track.

A Sensex index fund, for example, will invest in all Sensex businesses in the same proportion as they are represented in the index. Index funds are low-cost since they don't require a fund manager's active management.

  • What are the benefits of investing in equity-based mutual funds?
  • Professionals maintain the fund. 
  • It is economical and convenient. 
  • It provides diversification and flexibility.
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