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Investing in a single stock may carry a comparatively higher risk than what most investors may be willing to bear. In such a case, equity funds become the best way to get exposure to stocks with lower risk.
But what exactly is an equity mutual fund? How does an equity fund work? In this story, we will answer these questions and look at equity funds in greater detail.
An equity fund predominantly invests in different stocks based on market caps, sectors, themes and countries. Equity funds are known to be more tax-efficient than other mutual funds.
Equity funds can generate better returns than debt funds because they invest in direct equity. Historical data suggests that equity funds may generate anywhere between 9-16% returns over the long term (5+ years).
In terms of risk, equity funds are generally safer than stocks but riskier than other mutual funds like debt funds, liquid funds, etc. Thus, it is advisable to know your risk profile before investing in equity funds.
Get curated equity fund recommendations by taking a simple risk analysis quiz on the Cube Wealth app.
An equity mutual fund consists of money collected from several investors. A fund manager will invest this money in various stocks based on the fund’s objectives and investment philosophy.
For example, an equity fund’s objective may be to generate long term capital growth. It can achieve the objective by investing in a single market cap/sector/country or across market caps/sectors/countries.
Equity funds invest at least 60% of their capital in stocks. The remaining portfolio may consist of debt and money market securities that may lower the overall risk that the fund carries.
Equity funds are classified based on:
Let’s look at each of these categories in detail.
Market capitalisation or market cap is the total market value of an organization’s stocks. Equity funds are broadly classified into 4 types based on the market cap they invest in:
Stocks of companies that have a market cap less than ₹5000 crores are called small-cap stocks. A small-cap fund primarily invests in these small-cap stocks.
Small-cap companies are usually in their nascent stage of development that can lead to above-average volatility along with the potential for long term growth and profitability.
Thus, small-cap stocks and, by association, small-cap funds, carry a high degree of risk that is defined by erratic price fluctuations and short term uncertainty.
Read this blog to know all about small-cap funds
Mid-cap companies have a market cap between above ₹5000 to ₹20,000 crores. Funds that invest in the stocks of these companies are known as mid-cap funds.
Mid-cap companies may not be industry-leading icons, but neither are they minnows. Thus, mid-cap funds can generate potentially better returns than large-cap funds yet offer better stability than small -cap funds.
Read this blog to know all about mid-cap funds
Companies with a market cap of more than ₹20,000 crores are known as large-cap companies. Large-cap funds invest in the stocks of these companies.
Large-cap companies are well-established juggernauts in their industry and have a reliable business model and leadership. Thus, large-cap funds are generally more stable than mid-cap or small-cap funds.
However, given the size of large-cap companies, they may not deliver exorbitant returns like small-cap funds or mid-cap funds. They are low risk, low reward investments.
Read this blog to know all about large-cap funds
It’s difficult to anticipate when the market will favour large-cap, mid-cap, or small-cap funds. Thus, it is important to diversify your portfolio. Download the Cube Wealth app to build the perfect portfolio.
Multi cap funds invest in the stocks of companies from all 3 market caps. This strategy offers diversification that can be useful for investors from different schools of thought.
Read this blog to know all about multi-cap funds
An equity fund may invest in a particular sector like IT, Infrastructure, Financials, etc. These funds are called sector funds. Thematic funds can be easily understood with this analogy:
Just like a large-cap fund invests in large-cap companies that may be from various sectors, a thematic fund will invest in a pre-decided theme across market caps and sectors.
For example, if the thematic fund decides to invest in fruits, it may buy stocks of apples, oranges, melons, etc. regardless of their size but it will not invest in vegetables like peas or potatoes.
Read this blog to know all about sector funds
An equity fund may be actively or passively managed. An actively managed fund will have a fund manager who is actively involved in buying and selling securities to generate returns.
A passively managed fund is also spearheaded by a fund manager who will create a portfolio that mirrors a stock market index and then take a back seat.
The active involvement of the fund manager may lead to better returns than a passive fund that simply tracks an index. But actively managed funds are more expensive than passively managed funds.
International funds and global funds are equity funds that invest in the stocks of international companies like Tesla, Microsoft, Apple, Amazon, Google, etc.
What sets them apart from each other is that international funds invest in countries like the USA, Japan, China, etc. while global funds invest in India as well as foreign countries.
Read this to know more about international & global funds
New investors may wonder if investing in stocks is the same as investing in an equity fund. The truth is, stocks and equity funds are far from similar.
When you invest in stocks, you own a piece of the company you’re investing in. But when you invest in equity funds, you own units of the fund, not a piece of a company.
Moreover, stocks/shares are traded between investors while mutual funds can only be bought from a fund house or Asset Management Company.
Investing in stocks requires dense research that may be a problem for beginner DIY investors and busy professionals. However, mutual funds solve this problem since the fund manager does all of the investing.
Here’s a table of differences between equity funds and stocks:
Download the Cube Wealth app to know if you should invest in equity funds or stocks.
The high risk, high reward nature of equity funds may be suitable for aggressive investors or patient investors who want to stay locked-in for 5+ years.
However, Cube’s mutual fund advisor, Wealth First, has simplified the way equity funds are grouped, opening the door for amateur and conservative investors to invest in comparatively low-risk equity funds.
1. Conservative: Low-risk equity funds
2. Moderate: Low-moderate risk equity funds
3. Aggressive: Moderate-high risk equity funds
4. International: High-risk equity funds
In general, investing in equity funds would depend on your investment goals and risk appetite. Thus, it is advisable to speak to a wealth coach before investing.
Investing in equity funds is very convenient using an app like Cube Wealth. For a low minimum investment amount, equity funds give investors access to different stocks each with their own benefits.
A good investment portfolio is a diverse investment portfolio. Equity funds take this phrase a bit too seriously and offer diversification within the fund through investments across companies, market caps, sectors, and countries.
The exposure to several stocks within the fund adds an extra layer of diversification to an investor’s overall portfolio. Apart from that, equity funds like ELSS funds also offer healthy tax benefits under section 80c.
A Systematic Investment Plan (SIP) is one of the most efficient ways to invest in an equity fund. A SIP means investing a small amount of money consistently over a period of time.
SIPs can help remedy the volatility of equity funds since you’ll be investing across market cycles over an extended period of time. This is also known as rupee cost averaging, where the highs are averaged out by the lows.
SIPs are more flexible and cost less than lump sum investments. You can invest in equity fund SIPs on the Cube Wealth app for as low as ₹1000. Download the Cube Wealth app for more information.
A lump sum equity fund investment would require you to invest a large sum of money. This can be a potential option based on what you can afford but comes with the requirement of timing the market.
The Cube Wealth app helps you invest a lump sum in equity funds with advice from Wealth First. Download the Cube Wealth app to know more.
Equity funds fare better than other mutual funds when it comes to taxes. Here’s a look at the tax on Short Term Capital Gains and Long Term Capital Gains on equity funds:
If you redeem your equity fund investment within a year, you’ll be liable to pay STCG tax of 15% (+4% Cess).
Equity fund investments redeemed after 1 year are liable for LTCG tax of 10% (+ 4% cess) LTCG on equity funds is tax-free up to ₹1,00,000.
Equity Linked Savings Schemes or ELSS funds offer a tax exemption of up to ₹1,50,000 under section 80c. ELSS funds have a lock-in period of 3 years.
Equity funds carry a certain degree of risk and volatility just like any other market-linked instrument. It is recommended that you understand your risk profile and evaluate your investment goals before investing in any mutual fund scheme.
However, equity mutual funds can be a potentially safe option if you invest using a trustworthy app like Cube Wealth.
The Cube Wealth app gives you access to the best equity funds handpicked and curated by our mutual fund advisor, Wealth First, who has a track record of beating the market by ~50%.
Every month, Wealth First analyses the market to select the best mutual funds that Cube users can invest in. Along with that, Wealth First also recommends when to sell a fund.
Download the Cube Wealth app to get started
Ans. Equity mutual funds work by collecting money from investors and using it to purchase a variety of stocks. Professional fund managers make investment decisions, aiming to achieve the fund's objectives.
Ans. Equity mutual funds are categorized based on factors like market capitalization (large-cap, mid-cap, small-cap), investment style (value, growth), and sectors (technology, healthcare, etc.).
Ans. Potential benefits include diversification, professional management, the potential for capital appreciation, and liquidity. Equity mutual funds offer an accessible entry point for stock market investment.
Ans. Equity mutual funds can be suitable for a wide range of investors, from those seeking long-term growth to those with shorter-term investment horizons. They can align with various risk tolerance levels.
Equity mutual funds are versatile investment vehicles that offer a convenient way for individuals to participate in the stock market. These funds pool money from various investors to build diversified portfolios of stocks, providing opportunities for capital appreciation and wealth-building. Equity mutual funds come in various categories, each suited to different investment goals and risk tolerance levels. They are managed by professional fund managers who make investment decisions on behalf of investors, making them a suitable choice for those seeking to invest in stocks without the need for individual stock picking. Before investing in equity mutual funds, it's crucial to understand your financial goals, risk tolerance, and the specific fund's investment strategy to make informed choices.
*Note: Facts & figures are as of 21-01-2021. While we update our blogs regularly, download the Cube Wealth app for the latest information on equity mutual funds.
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