June 06 , 2012
Equity funds are those mutual funds that invest most of the money pooled from investors into, surprise surprise, equity shares listed on stock exchanges. They may, however, hold a small portion (usually around 5% or so) of the funds in cash, so that they have funds to cater to investors who wish to withdraw; or so that they can respond in case they want to rush into the market at a sudden opportunity.
Types of equity funds
Equity funds themselves are of various types, such as Index funds, Sector funds and Diversified Equity funds. Each of these have specific mandates within the broad theme of equity.
Index funds invest only in shares of companies featuring on a specific index in a stock exchange. In Sector funds or Theme funds you will find shares of companies belonging to a particular economic sector or those falling under a certain theme. For instance, 'consumption' as a theme can include companies in FMCG, banking, media, automobiles, etc. Diversified Equity funds have no bias about the choice of shares they would be invested in. Fund managers of these invest in whatever shares they believe are set to do well based on their research.
Who should invest in equity mutual funds?
Investing in equity mutual funds is a great way to have exposure to equities. They are managed by expert fund managers. In order for investments to grow beyond inflation in 5, 10, 15 years or more it is unavoidable to expose a portion of them to equities. However since it requires some bit of knowledge and experience-not only in picking out and investing in quality equity shares but also in judging when to exit them- equity investment is not child's play. For salaried investors who are also short on time, equity mutual funds are the safer way to gain exposure to share market.
How to choose an equity mutual fund?
Don't forget the simple investment rule that long term investments (made for 5 years or more) has to be in equities. If your investment goal is to create a corpus for core needs like life retirement, marriage, child's education, home purchase then choose a fund from the best diversified equity funds.
If your investment is for casual wealth creation which can be called a satellite need, the investment should be in sector/theme funds that are 'in' at that time. Selecting the right sector/theme fund is somewhat tricky.
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