What Are Equity Mutual Funds and how does it Benefit Investors?

An equity mutual is a mutual fund that invests in equity and equity related instruments with the aim of long-term capital appreciation.

 Thus, an equity mutual fund is a mutual fund that invest in equity shares of companies that have potential to provide long term returns to investors.

An example of a growth oriented equity mutual fund would be a mutual fund that has in its portfolio companies with a proven track record of great revenue growth or younger companies with potential. Equity mutual funds follow different styles such as growth, blend and value funds and comprise the primary categories of equity mutual funds.

An equity mutual fund scheme generally aims to provide capital appreciation over the medium to long- term.

Growth Plan vs. IDCW(Income Distribution cum Capital Withdrawal’)

The term “Dividend Option” in mutual funds was changed to “IDCW” in April 2021 by SEBI.

Should the investor invest in Growth Plan VS IDCW?

• In a growth plan, the profits remain invested in the scheme. Over a long period, the investor can earn compounded returns. Growth plan NAV will always be higher than the IDCW option because on distribution of the available surplus the NAV of the scheme is reduced to that extent. .

• In IDCW, the available surplus may be dispensed partially or fully at the discretion of the fund manager / AMC / Trustees.
• If investors prefer capital appreciation or long-term wealth creation, they should invest in growth option of the mutual fund scheme.
• If the investors aim for cash-flows from their investments, then they may opt for IDCW option.

Benefits of Equity mutual Funds

• Potential for high returns over long term

This fund appeals to a lot of investors because of its potential for high return with high risk.

• Risk

Equity mutual funds are high-risk investment instruments. Therefore, you must consider investing in equity mutual fund schemes only if you are risk-tolerant and are willing to invest for at least 5 to 10 years. The only returns would be your profit on selling the investment and this would be the excess of selling price over the purchase price.

• Volatility

Equity mutual funds are extremely volatile as stocks fall and rise depending on market behaviour. Therefore, it is best suited for investors who are able to tolerate the volatility.

• Tax Efficiency

Equity mutual funds attract long term capital gains tax LTCG tax at 10% if the earning is above Rs 1 lakh and held more than a year.

• Money management

Fund managers who manage the equity fund are qualified professionals, who identify high potential stocks for the investors.

• Diversified Portfolio

A mix of stocks in a mutual fund creates diversification and helps to reduce the overall risk of investing in volatile stocks to some extent.  

To conclude, one should invest in equity mutual funds if one wishes to be a long-term investor in the stock market looking for capital appreciation.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.