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How do Equity Funds Work?

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The question “what is an equity fund?” is something that is thrown around far too often among young investors. Investors who are still in their early stages of investing are far too fascinated with this. And though the answer may be simple, it is considered just the starting line of one’s financial independence. That is because understanding equity funds is not enough. It is going through and sorting out from more than 10,000 publicly traded investments so that you can choose the best fit for your portfolio.

Coming back to the question though, what really is an equity fund?

Equity fund is basically a type of mutual fund or a type of private investment fund. It buys one the ownership in business in the form of publicly traded common stock. And that is where the term equity comes from. On other occasions, the ownership is in the private equity, which is when the equity funds invest in privately held companies that are not traded on the stock market.

How do these types of financial instruments work?

An equity fund allows you to park 60% or more of its assets in equity shares of a company. Now, a company might be termed under different equity categories based on its overall company value (or capitalisation). So, a company will be either a large cap, mid cap, or small cap based on its actual size of operations and revenues.

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A mutual fund manager may use different mix of ‘caps’ to fill up the mutual fund portfolio for an equity fund.  

You may be wondering what about the remaining 40% that is not invested in equity. Now we come to that.

The remaining shares are allocated to non-equity investment instruments like debt funds and government bonds. With this portion, the mutual fund manager seeks to fulfil redemption request if any raised by the investor

Based on the wide varieties in terms of finances, there exist different types of Equity Funds:

  1. International equity funds:

These are equity funds which invest in stocks outside of one’s national boundaries.

  1. Global equity funds:

These funds invest in stocks around the world including one’s own national boundaries but then they tend to favour foreign stocks by at least 80% of their overall portfolio weighting.

  1. Domestic equity funds

These funds invest in companies with a small market capitalisation.

Is equity fund a favourable investment vehicle for all?

Considering there is a high risk associated with equity funds, it is obviously not a preferred vehicle for all types of investors. If investors are risk-averse, they may tend to stay away from such funds or have a smaller holding of such type of MFs in their wealth generation portfolio. The equity-oriented stock holding pattern means that it is more appealing to aggressive investors who are willing to take big risks to avail bigger returns. This way, they can accelerate their wealth creation goals with the help of equity fund investment.

To conclude

It would be safe to say that an investor who can afford to stay invested for five or more years should consider equity funds. That is to say that if you are planning for a short-term investment, equity funds should not be your go-to investment owing to market fluctuations.

In case you feel you have adequate in-depth knowledge of the market flow, then you can think of investing in equity shares. What’s better? You can even earn better profits from them.

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