HOW EQUITY MUTUAL FUNDS WORK?

Equity funds invest at least 60% of their corpus in equity and equity-related securities.  The performance of equity funds is actually quite simple. You allot money to a particular mutual fund that invests it inequity stocks on your behalf wherein the gains or losses get accrued to you. Needless to say, there are technicalities involved, but this is the crux of investing in mutual funds. However, being a sensible long-term investor, it helps to know more specifics about the working of an equity fund, assuming you know what is equity fund. So let us have a look at some of these specifics.

Investment Objective: First and foremost, equity mutual funds are not one size fits all. There are severaltypes of equity mutual funds classified based on their investment objective that needs to be mapped to your risk appetite. Though the primary objective of all equity funds is capital appreciation, it is the risk taken to achieve this objective. This further depends on the type of stocks that the equity fund invests in.

Investment Style or Strategy: As an investor, you need to know the investment strategy followed by the fund house, which means the methodology followed for picking stocks. The key investment styles or strategiesare top-down strategy, bottom-up strategy, growth strategy, and value strategy.

Asset Allocation: While most equity mutual funds are close to entirely investing in equities and equity-related securities, there are a few which may have a split allocation between predominantly equity (at least 65%) and the rest in debt or allocation between domestic and international equity.

Expenses: Lastly it’s important to know that you are charged for investing in the equity asset class. Though this holds true for all mutual fund schemes, but equity funds are charged more than other asset classes. These charges are known as expense ratio, which differs from fund to fund, even within asset classes, i.e. all equity funds do not have the same expense ratio. This difference is because of the way they are managed, i.e., actively managed or passively managed. Obviously, passively managed equity funds have a lower expense ratio. Expense ratios have the potential to adversely impact the returns gained on your mutual fund investments. So make sure you know about the expense ratio of your fund.

Simply put, an equity mutual fund scheme pools your investments and invests in equity shares or stocks afterin-depth research and analysis. Nevertheless, it is important to fathom the basics of how equity funds work. You can also seek the services of a financial expert if needed. Happy investing!