What Is Equity Mutual Funds And How Do They Work?

As of mid-June 2022, Sensex, the index comprising the top public companies in India, has grown more than 65%. On the other hand, Nifty, a similar index, has risen about 60% in the same time frame. This underlines a simple fact- if history is to be believed, equities continue to show splendid growth in the long term. Investing in equities is the best way to take advantage of this growth. But investing in them directly needs constant monitoring and the highest level of market knowledge. Equity mutual funds are a simple solution here. Let us learn more about equity mutual funds and see how they work.

What are equity mutual funds?

 The working of a mutual fund is simple. There will be a fund manager that pools money from different investors who are interested. Every fund will have a focus and its characteristics. A portfolio will be created according to that. Then, the money will be invested in that portfolio.

 

The elements of this portfolio are decided according to the fund's theme. For instance, if the fund is focused on keeping your investment risk-free, then the fund's portfolio could have more space for debt instruments.

 

Similarly, if the fund's theme is aggressive, the portfolio will have securities with similar characteristics. For example, equities are arguably the most aggressive security out there. Hence, most aggressive funds focus on equity investments. Such funds, with their theme aggressive and focus on equities, are called equity mutual funds. 

Advantages of equity mutual funds

Investing in equity mutual funds has many benefits, making it a popular choice among many investors. Let us take a look at some of its most sought-after advantages.

Higher returns

Historically speaking, equity tends to give investors the most returns over the years. Investing in equity mutual funds gives you similar advantages. This is especially true when you stay invested for a more extended period of time. What helps here is the power of compounding.

In investment terms, compounding is the process in which the returns you get from a scheme are reinvested so that the compounded corpus will earn returns.

 

For instance, if you invest Rs.1000 and get a profit of Rs.100, the compounded amount of Rs.1100 will start earning profit the next day. 

 

Compounding can do wonders to your investment when invested for a longer time.

Professional management

If you decide to invest in equities, you have two main options. Either you could invest directly, or you could do it through equity mutual funds. The latter gives you many advantages. Professional management is one such advantage.

This way, your money will be handled by experts in the field with years of experience. They will do an analysis for you and fine-tune the portfolio so that the fund meets its goals.

Easy to liquidate

Equity is highly liquid security. When it has the right amount of demand, it is next to money in case of liquidity. Equity mutual funds share the same character. Hence, there will not be a time when you have an issue with selling its units. Although it has to be understood that mutual funds redemption may take a day or two, unlike selling stocks directly.  

Things to have in mind before choosing equity mutual funds

 1)      Expense ratio - As mentioned above, professionals manage mutual funds. They are compensated by charging a small fee from investors. This is known as the expense ratio. 

 

2) Risk involved - Equity investments hold a high level of risk. Make sure you understand your risk appetite before investing. 

 

Proper planning is one factor that can ensure you have the best chance for success in any form of investment. So make sure you plan properly to get the best out of your investment.