5 Things to Know Before Investing in Equity Fund

Equity funds are mutual funds that mainly invest in equities. Investors can invest in this category of mutual funds via a systematic investment plan or SIP or by putting a lump sum amount. The fund managers then invest the collected funds in various stocks on the behalf of the investors. The gains or losses on these investments are reflected via an increase or decrease in the Net Asset Value of the mutual fund scheme. Before you decided to invest in an equity fund, you need to identify your investment objective and horizon besides understanding the terms and conditions associated with the fund.

 

Investment by Equity Funds

Equity mutual funds invest in the equity shares of different companies in different proportions and thus are highly suitable for investors looking for a long-term horizon. The asset allocation is decided in advance and decides the type and the objective of the fund.  Although these funds invest a majority of their corpus in stocks, a small proportion is also invested in debt and other financial instruments to offset the risk associated with equity investments. This also allows the fund to deal with any redemption requests that they may get.

While the basic objective of all equity funds is to benefit from the capital appreciation in the value of stocks, they may differ in terms of the type of shares they invest in.

An equity fund may invest in:

• Small-cap stocks
• Mid-cap stocks
• Large-cap stocks
• Multi-cap stocks
• Stocks of a specific sector or industry and therefore is called a sectoral fund.
• Stocks that conform to a particular theme or segment and so is called a thematic fund.
• A fixed number of stocks (a maximum of 30) and so is called a focused equity fund.
• Undervalued stocks and so is called a value fund.
• Stocks that are currently not performing well and so is called a Contra fund.

Equity funds generally invest around 65% of their corpus in equities with the rest allocated for investment in debt and other instruments. You have the option to invest in an equity mutual fund via the SIP route or go for a lump sum investment according to your financial situation.

 

What to Know Before Investing in an Equity Fund?

Before you decide to invest in an equity fund, you need to know all the details and the terms and conditions attached to it.

Here are some things you need to check before investing:

• The type of fund and its size.
• The expense ratio of the fund, which refers to the fee that an asset management company charges you for managing it. It may also include a commission paid to your broker.
• The risk-reward ratio and whether it conforms to your investment goals.
• Check whether any tax benefits are available or what type of taxes will be applicable.
• The funds’ past performance in comparison to its peers and the industry average.

The decision to invest in an equity fund should be in-line with your investment objective, ability to withstand risk, and investment horizon.