Introduction
Equity mutual funds are a popular choice for investors looking to achieve substantial returns over the long term. These funds invest primarily in stocks and aim to generate capital appreciation. This article will explain what equity funds are, how they work, and highlight the key considerations for the top 10 equity funds to consider for your mutual funds investment plans in 2024.
Understanding equity mutual funds
Equity mutual funds invest predominantly in shares of companies across various sectors and market capitalisations. The primary objective of these funds is to provide investors with capital growth by taking advantage of the stock market's potential for higher returns. Here are some key features of equity mutual funds:
Diversification:
Equity funds invest in a wide range of companies, spreading the investment risk across different sectors and industries.
Growth potential:
These funds offer the potential for significant capital appreciation over the long term, making them suitable for investors with a higher risk tolerance.
Professional management:
Equity mutual funds are managed by experienced fund managers who select stocks based on rigorous research and market analysis.
Variety:
There are various types of equity funds, including large-cap, mid-cap, small-cap, sectoral, and thematic funds, catering to different investment preferences and risk appetites.
Types of equity mutual funds
1. Large-cap funds
Large-cap funds invest in companies with large market capitalisations, typically the top 100 companies by market value. These companies are usually well-established, providing stability and steady returns.
2. Mid-cap funds
Mid-cap funds invest in medium-sized companies, which have the potential for higher growth compared to large-cap companies but come with higher risk.
3. Small-cap funds
Small-cap funds invest in smaller companies with high growth potential. These funds are riskier but can offer substantial returns over time.
4. Multi-cap funds
Multi-cap funds invest across companies of all sizes, offering a balanced approach to risk and return by diversifying across large-cap, mid-cap, and small-cap stocks.
5. Sectoral/thematic funds
Sectoral funds focus on specific sectors like technology, healthcare, or finance, while thematic funds invest based on particular themes or trends, such as green energy or digital innovation.
Benefits of equity mutual funds
Equity mutual funds provide several benefits, making them a popular investment choice:
Capital growth:
These funds have the potential to deliver high returns, making them ideal for wealth accumulation over the long term.
Diversification:
By investing in a range of companies, equity funds reduce the risk associated with investing in a single stock.
Liquidity:
Equity mutual funds are highly liquid, allowing investors to buy or sell units on any business day.
Tax efficiency:
Long-term capital gains (LTCG) from equity funds are tax-free up to ₹1 lakh per financial year, with gains above this limit taxed at 10%.
Choosing the right equity fund
When selecting an equity mutual fund, consider the following factors to ensure it aligns with your investment goals:
Investment horizon:
Equity funds are best suited for long-term investments. Ensure your investment horizon aligns with the fund's objectives.
Risk tolerance:
Assess your risk tolerance and choose a fund that matches your comfort level with market volatility.
Fund performance:
Review the historical performance of the fund, focusing on its track record over different market cycles.
Expense ratio:
Compare the expense ratios of similar funds to find a cost-effective option that doesn't erode your returns.
Fund manager expertise:
Consider the experience and track record of the fund manager, as their expertise can significantly impact the fund's performance.
Key considerations
Expense ratio:
This represents the annual maintenance charge a mutual fund incurs to cover various expenses such as management fees, allocation charges, advertising costs, and more.
Volatility:
This refers to the degree of variation in the price of a mutual fund over time. Standard deviation measures the dispersion of returns from the average, providing insights into the fund's historical price fluctuations. Beta, in contrast, compares the fund's volatility to that of the overall market.
Total returns since inception:
These returns give investors a long-term perspective on the fund's performance throughout its existence.
Portfolio turnover ratio (PTR):
This ratio indicates how frequently the fund's holdings are bought and sold within a specific period. A higher turnover ratio suggests more frequent trading, potentially leading to increased transaction costs and capital gains taxes for investors. Conversely, a lower turnover ratio implies a buy-and-hold strategy with fewer portfolio adjustments.
Tracking error:
This measures the variability between a mutual fund's performance and the performance of its benchmark index. A low tracking error indicates that the fund closely mirrors the benchmark, while a higher tracking error shows greater deviation.
Conclusion
Equity mutual funds offer a powerful way to grow your wealth over the long term. By understanding the different types of equity funds and their benefits, you can make informed decisions that align with your financial goals. The top 10 equity funds listed above are excellent choices to consider for your mutual funds investment plans in 2024. Whether you're looking for high growth potential, diversification, or tax efficiency, these funds provide a range of options to suit different investment preferences. Start investing in equity mutual funds today to maximise your returns and achieve your financial objectives.