What are equity funds? We tell you all about them

Equity funds are generally classified by size, investing style, market capitalization, and geographical location. Image source: Pixabay

Witnessing a bull run in stock market, most of us are tempted to test the waters, but shy away due to risk involved. For beginners, equity funds may an excellent investment option.

It allows the investor to invest in share market by using the expertise of the qualified and professional fund managers who primarily deal in equity investments, as per IIFL.

According to IIFL, equity fund or stock funds is a type of mutual fund that invests primarily in stocks or equities. It deals with shares of public limited companies.

Equity funds are generally classified by size, investing style, market capitalization, and geographical location.

People with professional expertise manage equity funds, and another significant advantage of this resource is that they are available for every type of investor, according to the report.

Here are some of the ways of investing in equity funds, according to IIFL.

The technique of lump sum investment
An investor who has a lump sum amount of money, some extra fund or the fund acquired after retirement can be invested in equity funds.

Systematic Investment Plan (SIP)
SIP is the most favoured method while investing in a mutual fund as this helps an investor to build a corpus in discipline and hassle-free manner. The main advantage of SIP is that it can be started even with a small amount and inculcates investing discipline.

The advantages of equity fund

Diversification: An investor may not have sufficient fund to invest in different stocks of the portfolio on their own. Through equity funds, portfolio diversification is more affordable and less risky when investing through equity funds than directly investing in the different type of stocks.

Investment convenience: One can invest very small amounts at regular intervals in equity funds by starting a SIP. These small amounts that the investor devotes inculcate a discipline of saving. This habit is beneficial when there is a plan for long-term investment and the wealth management.

Tax saving feature: Tax savings is a major benefit that an investor gets when he/she invests in a mutual fund. The investor can claim a tax rebate up to Rs1.5 lakhs under section 80C by investing in equity funds. This deduction is available when investing in Equity Linked Savings Scheme (ELSS) and the lock-in period for this fund is three years. If your investment period is more than a year, there is no need to pay taxes on capital gains. The dividend received through investments in equity funds are also tax-free, as reported by IIFL.

Liquidity: When investing in stocks, there is little or no liquidity option. However, investing in equity funds gives the investor more liquidity. They can redeem their investments when there is higher Net Asset Value (NAV) available than the price spent or invest more in equity mutual funds when the market is lower. Such freedom helps the investor to have better control over their investments, according to the report.

Professional management: The portfolio managers normally track the mutual fund's performance and invest the savings in the top performing stocks ensuring profitable returns.