A mutual fund is among the safest ways of increasing your wealth and saving for your retirement. They are of two kinds- debt and equity. While a debt fund is a low-risk option, its returns are consistent but low. Equity, on the other hand, generates higher returns with medium risks. If you are considering investing in medium risk options to increase your wealth, an equity fund is an answer to your worries. Read on to find out more on equity fund meaning, risks, and returns.

What is Equity Fund?

An equity fund is a by-product of mutual fund that invests primarily in stocks. You can manage it either actively or passively. They can be further put into categories based on the size of the companies in which the funds invest in, the size of holdings, your portfolio, as well as location. The frequency of buying and selling equity stocks affects your expense ratio. Lower the expense ratio, higher is the return.

Investing in equity funds are advisable for investors who are ready to invest for at least 5 years. If you are not thoroughly aware of the workings of the market, it is better to invest in large-cap equity funds that invest in stocks of blue chip companies. These funds are better to get a stable income from. If on the other hand, you are well versed, go for diversifying your portfolio to maximise returns. With equity funds, you can also avail tax savings under Section 80C of Income Tax Act.

Types of Equity Funds –

The various classifications of equity funds include-

Based on Sectors

They include equity funds of stocks belonging to a particular sector such as pharmaceutical or Fast Moving Consumer Goods. These are risky investments as there is no diversification and leads to losses if your sector of investment is suffering loss.

Based on Market Capitalisation

Large Cap Equity Funds- These include stocks of blue chip companies that are consistently doing well. They are safe investment options that guarantee consistent returns.

Mid Cap Equity Funds- The stocks of medium-sized companies come under this category. You can expect fluctuating returns from such stocks.

Small Cap Equity Funds- Smaller companies that are more prone to market volatility make up this category. Investing in these equity funds is risky.

Based on Investment Style

Active Investment Style – In this style of investment, your fund manager regularly updates your portfolio to suit the market.

Passive Investment- In this investment style, your investment follows an index. Your portfolio composition imitates the composition of the index.

Benefits of Equity Mutual Funds

• Low cost
• Convenient Investment
• Liquidity
• Diversification of Your Portfolio
• Systematic Investment
• Flexibility

Most people fear to invest in stocks due to the lack of knowledge of the same. They are generally confused about what is equity fund. In short, an equity fund is a vehicle of large capital gain even if you do not possess much knowledge of investment. Only a little research into the financials of a fund and you are good to go.