Mutual funds are one of the preferred investment vehicles for retail investors. Not only do they offer high returns, they also provide tax benefits. However, the availability of different types of mutual funds often confuses investors. That said, if you are planning to invest in the shares of companies, an equity fund can be the right option.

Wondering what is an equity fund? Read on to learn about it.

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Equity Fund is a type of mutual fund scheme that primarily invests in the shares of various companies across market capitalisation. With this type of mutual fund, fund managers aim to generate higher returns by spreading investment into different company shares or stocks.

At this point, prospective investors must be thinking about how does an equity mutual fund work? Here is the answer -

Investors invest their wealth in such a mutual fund scheme via a lump sum payment or SIP. Thereafter, this sum gets invested in an array of stocks on their behalf by the fund manager.

In addition, as per the regulations of the Securities Exchange Board of India (SEBI), equity mutual funds must invest a minimum of 65% of the corpus into equity or equity-related instruments.

Equity mutual funds mandate investing 65% of its assets in equity shares of different companies. The asset allocation occurs aligning with the investment objective. Depending on the market condition, the asset allocation can be done in small cap, large cap, or mid-cap companies.

Once asset allocation is done in various equity shares, the remaining amount can go into debt or money market instruments. Keeping in mind risk level and sudden redemption request, the fund manager makes buying or selling decisions to match with the market movement and reap maximum return.

There are several features of equity funds that can be attractive for potential investors. Discussed below are the benefits of equity mutual funds:

• Professional Management- Equity funds are managed by experienced fund managers. These individuals conduct thorough market research, analyse the performance of various companies, and invest in high performing stocks that can guarantee maximum returns.

• Portfolio Diversification- As mentioned earlier, equity funds enable investors to invest in various stocks. Therefore, they can effectively diversify their portfolio, which helps them spread the risk of equity investments across various instruments.

• Easy Investment TooI- Investment through the Systematic Investment Plan (SIP) method enables investors to invest weekly, bi-weekly or monthly or quarterly with a minimum amount of ₹500. The low investment amount allows investors to try their hand in equity-based investments.

If you have a long term goal, for instance five years or more, then Equity mutual funds are the right option for you. Additionally, budding investors can find it a suitable investment option as well.

Investors wondering how to invest in equity funds in India can choose any of the following investment processes:

• Lumpsum Investment: In lump sum equity fund investment, investors pay the entire investment amount in a single payment.
• Investment via SIP: In Systematic Investment Planning or SIP, investors pay a small amount at regular intervals for a pre-set tenure.

There are certain points that investors must consider before investing in Equity mutual fund.

Investment Objective

Before investing in an equity mutual fund, investors must assess their requirements and the relevance of the scheme. It is the investment objective that helps to decide the level and type of return in the fund and risk associated with it.

Risk Reward Ratio

Risk Reward Ratio (RRR) is the return that investors earn against the money they have risked and invested in the market. This ratio helps to assess the maximum return an investor can receive and the maximum risk they have to take. Here, investors must align RRR with their investment risk tolerance.

Returns and Past Performance

Funds that have offered consistent annual  performance or have effectively beaten the index are usually the first preferences of investors.

Time Horizon

Investment time horizon plays a significant role in deciding the level of risk an investor is willing to take.  Investors  who have an investment horizon exceeding five years can find equity fund a best bet.

Expense Ratio

Expense ratio is another important factor that investors must consider. Expense ratio is a fee that every fund house levy for managing the fund. It increases the total investment cost, hence investors must have a clear knowledge on this.

Experience of Fund Manager

Having knowledge about the qualification and past performance of a fund manager is important as you will be trusting your hard-earn money with somebody else. An ideal fund manager must have a stable and reliable fund management policy and philosophy.

We hope that this article offered thorough knowledge about equity funds to prospective investors. However, bear in mind that equity mutual funds require one to have a high-risk tolerance. So, investors must evaluate their risk appetite, financial goals, and investment horizon before investing in a long-term equity fund.