What is an Equity Mutual Fund?
Equity Mutual Fund that invests principally in stocks is called an Equity Mutual Fund. They are also called as Stock Mutual Funds. By purchasing equity (stock) an investor becomes an owner in a corporation with the right to share in any future profits by the company.
The objective of Equity Mutual Fund is growth through capital gains (profit that results from selling a capital asset, such as stock, where the amount realized exceeds the purchase price) and/or dividends (distribution of profits). Equity Mutual Funds performance is linked to the performance of the stock market.
For whom are Equity Mutual Funds suitable?
The investor as a share holder of the company also needs to take the risks involved with it. These kinds of mutual funds are suitable for the kind of investors who are willing to take the risks involved and who are aware of the market conditions. Basically Equity Mutual Funds are more suitable for seasoned investors. For an investor investing in Equity Mutual Funds, timing the entry is crucial also equally important is the exiting time. Also picking up the right type of Equity Mutual Fund is very important too.
Objectives Of Mutual Funds
Depending on the mutual fund scheme that you invest, mutual funds have the following objectives:
1.
Capital growth
2.
Preservation of Capital
3.
Steady income
Features of Mutual Funds
1.
Diversification:
Mutual funds invest in diversified financial instruments. Diversification as we know, helps minimize risk and loss. Investing all your money in a single investment option is quite foolish. Say, you invest all your money in fixed-income securities, you’ll earn moderate returns but your investments will not grow. On the other hand, if you invest everything in stocks, chances are you will lose all your money if stock markets crash. So, you will neither enjoy good returns nor capital growth.
Mutual funds offer a diversified portfolio that allows investors to realize the best of safety and capital growth based on their risk appetite.
2.
Objective:
According to the type of mutual fund that’s invested, you can achieve objectives like steady income, higher returns, capital growth or a combination of any /all of these.
3.
Fund manager:
Most investors don’t have enough time, knowledge or interest to research individual stocks and bonds. Mutual funds therefore, are the best options for such investors, because these are managed by a professional fund manager who is dedicated to meet the investment objectives.
4.
Low Fees:
Picking individual stocks can be a costly affair, because of broker fees and commissions. Mostly, mutual funds charge operational fees which are less than 1% a year. They also charge an exit load. Nevertheless, there are certain "no-load" mutual funds that don't charge investors anything.
5.
Categories:
Mutual funds fall in three categories:
Equity funds:
These investments are made only in equity mutual funds or shares. They are highly risky and may give higher returns compared to other categories.
Fixed-income funds:
These are invested in bonds, treasury bills, corporate deposits and so on. They provide fixed returns and are the least risky, compared to other categories.
Balanced funds:
These funds are invested in both stocks and bonds to offer moderate to low risk.
Advantages of Mutual Funds
1.
Mutual funds offer the benefits of diversification.
2.
Through mutual funds, you outsource the task of managing your funds to a professional manager, who ensures your funds are invested in the right place as per risk appetite.
3.
Mutual funds are highly liquid. You can sell your units freely and quickly, if you have opted for open-ended mutual funds.
4.
By investing in mutual funds, you save broker fees, commissions, professional management fees, and so on. Mutual funds charge little to manage your funds.
5.
Most mutual funds are tax-efficient. Tax on LTCG (Long-term Capital Gains) on equity-oriented mutual funds, are Nil up to 1 Lakh a year. In case of debt funds, LTCG only applies if you hold them for 3 years and you enjoy the indexation benefit. ELSS funds are exempt under Section 80C up to a maximum limit of Rs 1.5 Lakh a year.
6.
You can start by investing an amount as low as Rs 500 via SIPs.
7.
With Systematic Investment Plans or SIPs, your money automatically gets debited from your bank account towards mutual fund investments.
8.
AMCs are governed by SEBI. Hence, they are safe and transparent.
9.
You may either choose to invest in Mutual Funds through SIPs or as a lump sum.
