An Equity Mutual Fund, most commonly known as the stock fund is a fund that invests in the shares of an enterprise. Unlike debt fund, these funds invest largely in equity share and equity related investment. The objective of investment in such fund is to get capital gain through investment in growth asset.
Advantages of Equity Mutual Funds
The main advantages of equity mutual funds are
- Diversified Portfolio
- Capital Appreciation
- No brokerage or commissions
- Professional management
- Economies of scale
- Tax benefits
- Tax deferral
- Convenient options
- Systematic approach to investment
Disadvantages of Equity Mutual Funds
The main disadvantages of equity mutual funds are
- The dividend is neither fixed nor controllable by you.
- It is risky investment compared to debt funds.
- No control over cost. The fluctuation in Market Price can sometimes lead to loss.
- An equity investor has no powers to impact decision of the company using the voting rights.
- Lack of portfolio customization
- Choice overload
Types of Equity Funds
Diversified Equity Fund
Diversified equity fund is that category of funds that invest in a different types of securities in different sectors.
An index fund buys and sells securities in the same manner as the composition of the index selected. The fund manager tracks the underlying index’s performance therefore an index fund has low management costs than other types of funds.
A growth fund invests in the shares of rapidly growing companies. Growth funds focus on generating capital gains rather than income.
Value Fund is a fund that invests in “value” stocks. The stock of a company is called as value stocks usually when they are older and pay good dividends.
Sector funds invest only in a specific sector.
Thematic funds invest keeping in mind a certain investment theme. For instance, an infrastructure fund will invest in shares of those enterprises that work in the infrastructure development such as infrastructure construction, cement, steel, power etc. The investment is thus more broad-based than a sector fund.
An equity income fund focuses on current income rather than growth.
Rajiv Gandhi equity saving scheme (RGESS)
Equity Linked Saving Scheme (ELSS)
This scheme offers tax benefits to the investors. In Equity Linked Savings Scheme (ELSS) the investment has the lock in period of three years.
Arbitrage funds take opposite position in different markets, such that the risk is reduced to zero, but a good return is earned. For example, by buying shares in BSE, and simultaneously selling the same share in NSE at a higher price.
To invest in the mutual funds might appear risky but with the knowledge and insight of the available scheme could help you in making a wiser investment decision.