What Are Equity Funds And Their Benefits?

Equity funds are those investment options that primarily invest in stocks. You can invest in these funds via a Systematic Investment Plan (SIP) or lump sum. Investors had only one option under equity funds until recently - mutual funds. However, today, investors can also explore Exchange Traded Funds (ETFs). We have many equity ETFs for investors to explore for their different financial goals.

What are equity funds?

Equity funds invest in the stocks of different companies to generate returns. Equity funds have the potential to generate higher returns for investors, but at the same time, they carry a higher risk. 

Many equity funds are available in the Indian stock market - each has a different investment objective and is suited for investors with a specific risk profile. Make an equity fund investment per your risk profile and investment horizon. 

How does an equity fund work?

Equity funds invest your money in equity shares of various companies in different proportions. Depending on the type of equity fund you have selected, the asset allocation can be in small-cap, mid-cap, or large-cap companies. 

The Indian stock market offers actively and passively managed equity funds to investors. Mutual funds are actively-managed funds, while ETFs are passively-managed. 

For those new to ETFs - they track a particular index, but the concept is still the same - your money gets invested in different companies through a single fund.

The benefits of investing in equity funds

The first rule of investing is that you should have a diversified portfolio. An equity fund investment will always be essential for your portfolio if you want to create a corpus. Let us look at some of the benefits of investing in equity funds:

Capital Growth: Only a few investment options can provide investors with returns that outperform inflation. Equity funds are right there on the list. Equity funds allow you to create substantial wealth if you stay invested for the long term.

You can start small: Equity funds allow you to start small - actively managed funds lets you start investing with as little as Rs 500. The same holds for passive funds - ETFs. They can be bought and sold like shares. Most ETF unit prices are below Rs 200.

Portfolio diversification: When you invest in equity funds, your investment goes into many stocks. Hence your equity portfolio is automatically diversified.

Tax benefits: Equity funds like ELSS allow you to get a tax rebate of up to Rs 1.5 lakh on your investments. For ETFs, your capital gains are exempted from taxation up to Rs 1 lakh in a financial year.

Should you invest in equity funds?

Equity funds are volatile and risky. They are the best and perhaps the only option to create wealth. Hence, every investor should invest in equity funds. 

You need to ensure that you should stay invested for a long time. You should avoid equity funds if your investment horizon is short (less than a year). Depending on the fund category, the ideal investment time will differ. For example, you can invest in large-cap equity funds with an investment horizon of three or more years. Small and mid-cap stocks should have an investment horizon of more than five years. 

Hopefully, the information will be beneficial to you. Now you will invest in the right equity funds.