Equity mutual funds do not mean guaranteed returns. But neither do they mean guaranteed losses. A lot of individuals misinterpret equity funds and are convinced that they will definitely lose their money sooner than later. However, that is not true at all. In fact. Equity funds have outperformed every other type of conventional investment avenue in the past with an average return of 12% to 15%.
Let us understand equity mutual funds and how beginners should approach these market linked schemes for long term wealth creation.
What is an equity mutual fund?
An equity mutual fund can be open ended or close ended. An open ended equity scheme is a mutual fund where investors can enter or exit their investments at any given time. On the other hand, close ended refers to the duration where one can only buy units of the equity fund but cannot sell until a defined period. It is usually the NFO period.
Equity mutual funds try to create long term capital appreciation by predominantly investing in equity and equity related instruments of publicly listed companies. Of its total assets, an equity fund may invest anywhere between 65% to 80% in stocks.
Things to keep in mind before investing in equity funds
There are different types of equity funds – Some equity funds like large cap or small cap predominantly invest in one type of market cap. On the other hand, schemes like flexi cap and multi cap have portfolio exposure to stocks of companies spread across market capitalizations. Then there are equity funds that specifically target stocks of companies belonging to a specific sector or industry.
Equity funds help you save tax – Equity Linked Savings Scheme (ELSS) is an equity mutual fund that comes with a tax benefit. You can invest up to Rs 1.5 Lacs every fiscal year in this tax saver fund and bring down your tax liability. Investors can use this fund as it offers the dual benefit of tax saving and long term capital appreciation. ELSS has the shortest lock-in period which is just three years.
Invest through Systematic Investment Plan – Like other investment avenues, one does not need a large investment sum to start investing in equity mutual funds. Through a Systematic Investment Plan (SIP) one can start investing with an amount as low as Rs 500 every month. Investors have total control over their SIP investments, and they can invest any sum they are comfortable investing regularly. To calculate the total returns investors can potentially earn over a fixed period through SIP investing, one can use the SIP calculator, a free online total easily accessible to everyone.
Invest without a DEMAT account – To start investing in equity funds, one does not need to have a DEMAT account. Investors can invest in mutual funds through their bank using the mobile app or any other online platform made available by different aggregators, AMCs, and fund houses.
How to start investing in equity funds?
The very first step for any individual to begin their mutual investment journey is by becoming KYC compliant. Know Your Customer is a mandatory one-time procedure that everyone must comply with. The individual must enter all the necessary details like name, age, gender, address, marital status, nationality, etc., and submit photocopies of their address proof, identity proof along with a passport size photograph. The AMC will then confirm all the detail either via a video call or by sending someone from their end for in-person verification. Once all your details are verified you can start investing in equity mutual funds.
