In the world of investing, new investors can sometimes get lost because of the plethora of options available. Depending on their risk appetite investors can either invest in conventional schemes or market linked schemes. For many years and even right now to a very large extent, Indians prefer investing their hard-earned money in traditional investment avenues like gold, bank fixed deposits, public provident funds, etc. These investment avenues are generally preferred by investors who are risk-averse and do not wish to take any risk with their finances. However, over the years people have noticed a sharp fall in interest rates. And since these conservative investment avenues offer fixed interest rates, in contemporary times, and investors are getting anywhere between 4%-5% rate of return.

Such low returns can hardly help someone become financially stable in the future. People are not able to achieve their long-term goals as they aren’t just not earning enough through conservative investment avenues. This is one of the major reasons why more and more people are now switching to market linked schemes like equity mutual funds. 

What is an equity mutual fund?

Equity mutual funds are one of the most sought-after investment avenues among retail investors. These are a pool of professionally managed funds that invest in a diversified portfolio of securities and offer active risk management. This is the main reason why a lot of people invest in equity mutual funds even though they do not have any prior market knowledge.

Equity funds avoid concentration risk by investing in a basket of securities consisting of various company stocks. They have a high-risk returns tradeoff and are generally considered by investors who have a long term investment horizon and a very high-risk tolerance.

How do equity mutual funds work?

As mentioned earlier, these are professionally managed funds that aim to generate capital appreciation over the long term by investing in equity and equity related instruments of companies that are publicly listed in India. What Asset Management Companies owning equity mutual funds do is that they accumulate financial resources from investors sharing a common investment objective and invest this pool of funds across the market cap. The fund managers, along with their team of analysts and market researchers, build a portfolio of stocks that can outperform over the long term and deliver decent returns. The fund manager has to comply with SEBI guidelines while investing in equity funds. For example, the fund manager managing a small cap fund must invest a minimum of 65% of the total investible corpus in small cap stocks. The fund manager may either invest the entire investible corpus or reserve certain funds depending on current market conditions.

Mutual fund investors who invest in equity funds receive units in quantum with the fund’s current NAV (net asset value). For example, if you invest Rs. 5000 in an equity fund whose current NAV stands at Rs. 20, you will receive 250 units. The allotment of units may vary in quantity depending on the fluctuating NAV.

How to invest in equity funds?

Aspiring investors can start a SIP in equity funds. A Systematic Investment Plan or SIP is a simple investment approach where you can invest a fixed sum at periodic intervals. Investors can even make the most out of the SIP calculator, a free online tool where they can get an estimate on their overall returns which they will receive at the end of their SIP investment journey. If they want, they can even make a one-time lumpsum investment instead of SIP but this will expose a large portion of their finances to market volatility.