Investors seeking long term capital appreciation and having a moderately high risk appetite can consider investing in mutual funds. Mutual funds are an investment tool where AMCs collect funds from investors sharing a common investment objective and invest this money in various money market instruments.
Here is what SEBI’s investors education initiative says about mutual funds* – “Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.
Investments in securities are spread across a wide cross-section of industries and sectors, and thus the risk is reduced.
Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unitholders.”
Although one isn’t obliged to remain invested in mutual funds for the long run, if you do manage to stay for a long term, your investments stand a chance to benefit from the power of compounding. But before you make any type of investment, it is advisable first to identify the core purpose of your investment. Are you investing in building a retirement corpus, or you already have that planned out and investing for your children’s education and future? Whatever it is, make sure that you first understand the purpose and reason behind your investment.
Once you know your goal, next is to know how many years you have in hand to reach that goal. Make sure that your investment horizon is long enough to achieve the desirable corpus. Now comes the most crucial thing, risk appetite. Without knowing your risk appetite, never consider investing not just in mutual funds but in any kind of scheme. An investor must identify his / her risk appetite and always invest within their limits.
If you have a long investment horizon and do not mind giving your investment portfolio a slightly aggressive approach, you can consider investing in equity funds.
But what are equity funds? Are there any further types of equity funds? If you too are asking these questions, read on:
What are equity funds?
Equity funds are those mutual funds that invest predominantly in equity and equity related instruments. Equity investments are in constant exposure from market risk, and hence investors with only moderately high/high risk appetite should consider investing in equity mutual funds.
Equity funds are further divided into –
Multi cap fund
Large cap fund
Mid cap fund
Large and mid cap fund
Small cap fund
IDCW yield fund
Value cap fund
Contra fund
Focused Fund
Thematic Fund
ELSS
Here’s a brief description of the above funds.
Multi cap fund: Multi cap funds are those equity funds which invests in stocks or large cap, mid cap, and small cap companies where a minimum of 65 per cent is invested in equity and equity related instruments.
Large cap fund: Large cap fund is an open ended equity scheme which invests predominantly in stocks of large cap companies where a minimum of 80 per cent is invested in equity and equity related instruments of large cap companies.
Mid cap fund: Mid cap fund is an open ended equity scheme that predominantly invests in stocks of mid cap companies. Of the total assets, a minimum of 65 per cent is invested in equity and equity related instruments of mid cap companies.
Large & Mid cap fund: Large & Mid cap funds are those equity funds which predominantly invests in stocks of large and mid cap companies. Of the total assets, a minimum of 35 per cent each is invested in equity and equity related instruments of large cap and mid cap companies.
Small Cap Fund: Small cap funds predominantly invests in stocks of mid cap companies. Of the total assets, a minimum of 65 per cent is invested in equity and equity related instruments of small cap companies.
IDCW yield fund: IDCW yield funds are those equity funds which predominantly invests in IDCW yielding stocks. It is mandatory for the scheme to predominantly invest in IDCW yielding stocks. Of the total assets, a minimum investment of 65 per cent is made in equity.
Value cap fund: Value fund is an open ended equity scheme that follows a value strategy. Of the total assets, a minimum of 65 per cent has to be invested in equity & equity related instruments.
Contra fund: Contra funds are those equity funds which follows the contrarian investment strategy. Of the total assets, a minimum of 65 per cent is invested in investment in equity and equity related instruments.
Focused fund: Focused fund focuses on a maximum number of 30 stocks. Here, of the total assets, a minimum of 65 per cent is invested in equity & equity related instruments.
Thematic/Sectoral fund: Thematic is an open ended equity scheme investing in a particular sector. Of the total assets, a minimum investment of 80 per cent has to be made in equity & equity related instruments of a particular sector/ particular theme.
ELSS: Equity Linked Saving Scheme is an open ended equity scheme which comes with a statutory lock in of 3 years and offers investors with tax benefits. Of the total assets, a minimum investment of 80 per cent is made in equity and equity related instruments.
Now that you know which equity fund invests in which asset, are you willing to take some risk and invest in any of these funds? Remember that equity investments need time to grow and hence always keep a long term horizon while considering investing your money in equity funds.
If you limit your investments and do not invest beyond your risk appetite, you, too, stand a chance of making some gains. Adopt an investment strategy and stick to it.
With little patience and smart investments, you might be able to get closer to your desired corpus.
Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
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