Salient Features
These are by far the most widely known category of funds though they account for broadly 40% of the industry’s assets, while the remaining 60% is contributed by debt oriented funds. Equity funds essentially invest the investor’s money in equity shares of companies. Fund managers try and identify companies with good future prospects and invest in the shares of such companies. They generally are considered as having the highest levels of risks (equity share prices can fluctuate a lot), and hence, they also offer the probability of maximum returns. However, High Risk, High Return should
not be understood as “If I take high risk I will get high returns”. Nobody is guaranteeing higher returns if one takes high risk by investing in equity funds, hence it must be understood that “If I take high risk, I may get high returns or I may also incur losses”. This concept of Higher the Risk, Higher the Returns must be clearly understood before investing in Equity Funds, as it is one of the important characteristic s of Equity fund investing.
Equity Fund Definition
Equity Funds are defined as those funds which have at least 65% of their Average Weekly Net Assets invested in Indian Equities. This is important from taxation point of view, as funds investing 100% in international equities are also equity funds from the investors’ asset allocation point of view, but the tax laws do not recognise these funds as Equity Funds and hence investors have to pay tax on the Long Term Capital Gains made from such investments (which they do not have to in case of equity funds which have at least 65% of their Average Weekly Net Assets invested in Indian Equities).
Equity Funds come in various flavours and the industry keeps innovating to make products available for all types of investors. Relatively safer types of Equity Funds include Index Funds and diversified Large Cap Funds, while the riskier varieties are the Sector Funds. However, since equities as an asset class are risky, there is no guaranteeing returns for any type of fund.
International Funds, Gold Funds (not to be confused with Gold ETF) and Fund of Funds are some of the different types of funds, which are designed for different types of investor preferences. These funds are explained later.
Equity Funds can be classified on the basis of market capitalisation of the stocks they invest in – namely Large Cap Funds, Mid Cap Funds or Small Cap Funds – or on the basis of investment strategy the scheme intends to have like Index Funds, Infrastructure Fund, Power Sector Fund, Quant Fund, Arbitrage Fund, Natural Resources Fund, etc. These funds are explained later.