Equity Mutual Funds — Everything You Need to Know

What is Equity Mutual Fund?

 

Equity mutual funds are a type of mutual funds, which take money from investors and invest them in multiple investment instruments — stocks, bonds, and more.

 

As the name suggests, equity funds help you invest in the shares or equities of various companies. The fund manager distributes investments among companies in various industries or with varied market capitalisations to get high returns. 

 

Also known as equity based mutual funds, these funds typically have higher returns than debt mutual funds or term deposits. However, these potentially higher returns also come with higher risk. This is because their performance is mainly dependent on market conditions, which can be quite volatile.

 

 

Equity Oriented Mutual Funds

 

This term is often used interchangeably with equity funds. Usually, mutual funds that allocate at least 65% of their investment to stocks and equity-related instruments are known as equity oriented mutual funds. 

 

What are the Benefits of Equity Mutual Funds?

 

Here is an overview of the benefits of equity mutual funds —

 

• Potential for High Returns 

As discussed before, the possibility of high returns is the most prominent attraction with respect to equity funds. Bonds, savings accounts, and fixed deposits are examples of conventional investment options that provide stable but relatively lower returns than equity funds. If you’re an investor looking to outpace inflation and enjoy long-term profits, you can certainly make equity mutual fund investments.

 

• Diversification

The principal benefit of mutual funds extends to this particular category too. You can enjoy diversification across various industries, companies, market capitalisations, and categories. This way, you can invest in a variety of equities and cut down the risk factor of your investments.

 

• Liquidity

Due to the high liquidity of equity funds, you can easily purchase and sell units on the market with ease. Furthermore, you can make transactions on all trading days. As a result, you can make the most of market trends and choose investments that help you reach your financial objectives. 

 

• Professional Management

Stock markets have long fascinated investors worldwide. However, if you are new to this sphere, it can be challenging to select the best stocks, take the risk, and make investments. This problem is easily solved by equity oriented mutual funds, which are managed by experts who handle your funds full-time. So instead of sitting and worrying about which shares to pick, you can simply let an expert make the decisions for you. 

 

What are the Types of Equity Mutual Funds?

 

Equity mutual funds can be broadly categorised based on their investment strategy, objectives, market cap, and more —

 

• Small, Mid, and Large-Cap Funds: These mutual funds are recognised by the market capitalisation of the companies in which the funds invest. 
• Multi-Cap Funds: As the name suggests, these funds invest across all market caps and provide diversification.
• International Equity Mutual Funds: These funds invest in stocks of companies listed outside the UAE. 

 

With international equity mutual funds, you can gain exposure to the markets of India, Japan, the USA, and more. 

 

• Sectoral or Thematic Funds: These funds concentrate on specific sectors or themes, which could be technology, healthcare, banking, and more. Such funds can be rewarding but riskier as well.
  For instance, if you’re bullish on the banking sector in the UAE, you can invest in mutual funds that mainly invest in the stocks of the leading banks.
• Value Funds: Value funds seek undervalued stocks with potential for future growth. If you have a high risk appetite, you can invest in such funds. 
• Dividend Yield Funds: Such equity based mutual funds invest in dividend-paying stocks, which provides you with a source of regular income.
• Focused Equity Funds: With a concentrated portfolio, these funds aim for high returns without investing in too many stocks and spreading the investments too thin.
• Sharia-compliant Funds: These mutual funds invest in companies that adhere to Islamic laws and principles. They avoid investments in businesses that are considered Haram (prohibited).
• ESG (Environmental, Social, and Governance) Funds: As the name indicates, these equity funds focus on companies with strong ESG practices.

 

How to Choose the Best Equity Mutual Fund for Yourself? 

 

Whether you are searching for the best equity mutual fund for long term or want options for quick returns, you investors should consider several factors:

 

• Understand Your Investment Objectives: Before investing, understand whether you want to invest for the long term or a shorter period. This will help you find a mutual fund that aligns with your goals.
• Fund Performance: Analyse the historical performance of the fund over different time periods — ideally at least 1, 3, and 5 years. 
  Note: Don’t rely solely on past performance as it cannot predict future returns.
• Risk Tolerance: Consider your risk appetite and choose equity mutual funds that match your comfort level. For example, if you want stable returns without much risk, you can go for large cap mutual funds or debt funds.
• Expense Ratio: Check the expense ratio of your favourite equity mutual funds. A lower ratio means lower expense with respect to the maintenance of your fund. 
• Fund Manager's Track Record: Ideally, you should choose a mutual fund whose fund manager has a proven track record of consistent performance.
• Look at Your Existing Portfolio: For instance, if most of your investments are in high-risk instruments, you should add some debt funds to balance the risk. Similarly, if you’ve only invested in large cap funds so far, try to pick one small cap mutual fund too.

 

What is the Equity Diversified Mutual Fund Meaning?

 

The term equity diversified mutual fund refers to funds that invest in companies across various market caps and industries. Such mutual funds present a great option for diversification within a fund itself. 

 

What is Equity Mutual Funds SIP?

 

Equity mutual funds SIP is a systematic approach to investing. Here, you commit to investing a fixed amount at regular intervals (typically monthly) in a particular mutual fund. This method of investment has several benefits like — 

 

• Cost Averaging: By investing regularly, your fund manager buys more units when prices are low and fewer units when prices are high. This, in the long run, averages out the purchase cost over time.
• Disciplined Investment: SIPs instill a disciplined approach to saving and investing, which is crucial for long-term wealth creation.
• Convenience: Automatic deductions from your bank account make the investment process hassle-free.

 

Private Equity Fund vs Mutual Fund

 

While the world of private equity is quite different from equity mutual funds, some of us may confuse the two. 
Let’s quickly understand the differences in terms of private equity fund vs mutual fund —

 

• Meaning

  • Private Equity Funds (PE): PE refers to investments made by individuals or groups into shares of companies that are not publicly listed for trading.
  • Mutual Funds: Professionally managed funds that pool money from a large group of investors, such funds invest in stocks of publicly listed companies.

 

• Risk and Return

  • PE: High risk due to unlisted companies. Success can lead to substantial returns, but failure can result in significant losses.
  • Mutual Funds: Lower risk as they invest in established, listed companies. Diversification across multiple companies mitigates risk.

 

• Investor Base

  • PE: Typically high net worth individuals, pension funds, and sophisticated investors.
  • Mutual Funds: Attract a broader range of investors, including retail investors.

 

• Investment Amount

  • PE: Requires a large capital investment
  • Mutual Funds: Allow smaller investments of say, AED 100 or AED 1,000 per month.

 

Equity Mutual Fund Taxation

 

While the UAE does not have any tax on personal income, this factor can certainly come into play if you invest in international equity mutual funds. 

 

For instance, in India, if you liquidate your investment within 12 months of purchase, you will be charged a short term capital gain (STCG) tax. Selling after this period leads to long term capital gain (LTCG) tax.

As per the latest updates, the LTCG rate in India can be up to 12.5%. The STCG, meanwhile, can be as high as 20%.

 

FAQs

 

 

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