An equity mutual fund is a mutual fund which is principally invested in stocks. These funds are usually more prone to risks and come with great return potential than other types of funds. Equity funding basically aims to maximize long-term returns from an optimally diversified portfolio invested in equity funds and equity related securities. There are thousands of equity mutual funds available in market; however, there are few broad categories under which most of these funds can be classified. These categories have been discussed below:
Types of Equity Funds
Growth Funds
Growth funds are stock funds in which investment is made in rapidly growing companies or in companies with higher potential for growth. The objective of such equity fund is to produce long term capital gains for the investor in a span of 4 to 5 years rather than periodical income and capital gain distribution. These funds are usually more volatile than other funds and are also significantly affected by market fluctuations.
Value Funds
Value equity funds reflects funds invested in companies having low P/E ratios or companies which have stopped growing and are using their earnings for one or other reasons. Fund manager aims to invest in stocks which are not currently recognized by market forces. Such stocks are traded at low price in market than their real value with an expectation of future increase in its value.
Aggressive Growth Funds
Aggressive growth funds are kind of growth funds invested in companies expecting rapid growth in near future. These funds are known as aggressive growth funds because they are tend to be traded as more frequently and take more risks than ordinary growth funds. As the trading frequency and risk in such funds is high, so is the return. However, investment in these funds is on the basis of expectation rather than on the basis of researched data.
Blend Funds
Blend funds are stocks that combine features of both growth and value equity funding. Fund managers investing in blend funds usually invests in both value and growth equity stocks, so investor can enjoy both current income and long term capital gain benefits within same equity fund.
Income Equity Fund (Dividend Yield Equity Funds)
Income equity funds are funds usually invested in large corporations to attain steady income in form of dividends distributed by companies. These funds are comparatively less risky than growth funds and also grow in its value in long term.
Tax Savings Equity Fund
Tax saving equity mutual funds provides twin benefits of return on investment and tax exemptions. It is great instrument of tax planning in which investment up to Rs 1 lakh is exempted from income under section 80C; however there is a lock in of three years before which investors can not withdraw invested amount. Dividends received under such investments are tax-free in the hands of the investors.
Equity Index Funds
Equity index funds are mutual funds combine features of an equity fund and stock fund. Fund managers track the performance of a specific index such as NIFTY50 or SENSEX or NASDAQ or S&P500 etc. These funds are less expensive and risky than other types of mutual funds
Equity funding offers many benefits to investors. Investors can gain huge from diversification of investment in a wide range of companies. It is comparatively less costly to invest in such funds than to buy each and every stock in a fund’s portfolio. However, for better results, an investor must reconcile their risk/return preference to the fund profile.
