Mutual funds that invest largely in stocks are known as equity funds. You can invest money in the fund as a lump sum amount or as a small amount through SIP. And the fund invests your money in various equity shares on your behalf. The gain or loss in the portfolio affects the Net Asset Value (NAV) of your fund. Of course, there are some complications to consider, but this is the heart of equity mutual funds. Investment,
What are Equity Mutual Funds?
To generate returns,
an equity mutual fund Invests primarily in equities of several companies. When multiple forms of mutual funds are compared, equity fund The more significant in investing is the risk. Also, there is no such thing as a ‘one-size-fits-all’ equity fund. Many different equity funds with different investment objectives should be carefully matched to your risk level.
Who should invest in Equity Mutual Funds?
Anyone willing to take on a fair amount of risk in return for long-term growth should invest in equity funds. Since equity funds primarily invest in stocks, they are subject to market risks. On the other hand, it gives them the ability to provide significant returns to investors. Equity Mutual Funds are a suitable investment method for those who want to leave their money in the hands of a fund manager and avoid the inconvenience of handling their investments on their own.
Suppose investors get better capital gains from their fund units. In that case, a dividend option is recommended as it will expand the number of units in the fund, resulting in higher returns in the future. Reinvesting your dividends on most investments is usually free management organization. If you want to get a regular return on your investment, then reinvestment is not a viable idea.
How do Equity Mutual Funds work?
Equity mutual funds invest 60% of their assets in various companies in a reasonable proportion. The asset allocation will be in line with the investment target. Depending on market conditions, asset allocation may be only in stocks of large-cap, small-cap or mid-cap enterprises. Value and growth investing are two different investment styles.
redemption
Let’s assume that some investors have elected to sell or redeem their stock. A total of 50,000 units were redeemed. This led to an outflow of Rs 6 lakh in money matters. The fund’s AUM comes down to Rs 1.14 crore, while its total number of units comes down to 9.5 lakh. As can be seen, the NAV remains at Rs 12 per unit.
The financial advisor will first pay investors out of the portfolio’s cash balance to deal with the redemption. If necessary, he may also choose to sell some stock shares. On the other hand, most fund managers can sell their stock holdings only if they believe the company has no more potential.
holding period
When investors redeem their fund units, they realize capital gains. In the hands of investors, capital gains are taxable. The tax rate is determined by how long a person stays invested, which is called the holding period.
Short-term equity holdings last less than a year, and short-term capital gains are taxed at 15%. Long term equity holdings held for more than a year, and long term capital gains are taxed at the rate of 10%, if they reach Rs 1 lakh per annum.
Fall in NAV
Let’s hypothetically assume that the stock prices in the portfolio are falling. The value of the portfolio has come down from Rs 1.14 crore to Rs 1.05 crore. The NAV has increased to Rs 11.05 per unit (1.05/95 lakh units).
The second investor contributes Rs 1 lakh to the scheme. He got only 9047.619 units for the same amount invested this time. With this transaction, the value of the portfolio increased to Rs 1.06 crore. The total number of units available under the scheme has increased by 9047.619 units.
We have divided them into simple steps to make it easy to understand Mutual Funds. In reality hundreds of investors could regularly buy or redeem units. However, the core operation remains the same.
cost of investment
The expense ratio of equity funds is often influenced by the buyers and sellers of equity shares. For equity funds, Securities and Exchange Board of India (SEBI) has set a limit of 2.5 percent. If the expense ratio is low, investors will get higher returns.
Diversity
In the case of equity mutual funds, you get exposure to multiple stocks by building an investment portfolio, and you get this benefit even for a small investment. However, your portfolio will be at risk of concentration.
conclusion
For investors seeking expert management, mutual funds are a viable option. They also help small investors to make regular savings. With a better understanding of how mutual funds work, investors can start investing with confidence.
Simply put, equity mutual funds pool your money and invest in companies after doing extensive research. However, it is important to understand the fundamentals of how equity funds work. It involves understanding the objective of an equity fund and matching it to your risk profile. Next comes the asset allocation of the fund, followed by its investment strategy. Last but not least, you should be aware of the fund’s expense ratio, as it can affect the returns it generates over time, and you can check for it. axis Bank mutual funds.