Mutual funds are a pool of professionally managed funds that invest in various asset classes like equity and debt as well as in money market instruments like gold, real estate, equity stocks, corporate bonds, government securities, debentures, treasury bills, commercial papers etc. Market regulator SEBI (Securities and Exchange Board of India) describes mutual funds as –
“a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced.”
Equity mutual funds are one of the most sought-after funds among other mutual fund categories. These funds are known to carry a high risk reward ratio and generally considered by investors with the higher appetite for risk. Equity funds predominantly invest in stocks in other equity related instruments thus carrying a high risk profile. Equity mutual funds have been the favorite investment choice of those who seek long-term appreciation through investments in market linked schemes. An equity fund invests a minimum of 80% of its total assets in equity and equity related instruments.
The equity funds directly provided capital appreciation to those who have remained patient with their investments. Here are some of the advantages and disadvantages and advantages of investing in these funds.
Pros of investing in equity mutual funds
unlike before equity funds are now available for investment via systematic investment plan. SIP is a modern and hassle free way to invest in equity funds. One does not need to have a large surplus at the disposable to invest in equity funds. Individuals can invest small amounts at regular intervals in equity funds as long as this amount suffices the minimum investment requirement mentioned in the offer document. One can target their life’s long term financial goals like building a retirement corpus for or planning the children’s wedding through equity fund investments. investing in equity funds through SIP can also allow investors to benefit from the power of compounding. Investing in equity funds via SIP may even and calculate the discipline or investing regularly. There are multiple equity schemes to choose from and investors depending on the investment objectives can invest from the available schemes. If you are only interested in investing in a fund that invests in stocks of large cap companies you can invest in large cap funds. Similarity if you want to take extra risk and invest in companies that hold the potential to offer higher returns in future then you can consider investing in small cap funds.
Drawbacks of equity fund investments
Investors with short term goals cannot consider equity funds. Equity funds are volatile in nature and highly affected by the constant fluctuations in the market. Those with a short term investment horizon may witness a negative graph and their equity portfolio. Mutual fund advisors generally recommend investors to have an investment horizon of at least five to seven years when investing in equity mutual funds. Some equity funds like equity linked savings schemes (ELSS) come with a predetermined 3 year lock in period. This means investors cannot withdraw their ELSS fund units for a minimum period of 36 months. Anyone looking to add some liquidity to their mutual fund portfolio might not be able to invest in ELSS as they may not be able to redeem the units according to their income needs.
Investing in equity funds has its own pros and cons. Investors are expected to consult a financial advisor before investing.