Why Choose Equity Mutual Funds for Investing?

26 March, 2025

Synopsis

• Investing in equities via mutual funds is considered a good option because professionals manage it and give you high returns and diversification benefits.

• Market risk, management fees, ease of liquidity and tax efficiency are among the investors' considerations before starting an investment via an equity mutual fund.
  
  

Building wealth for the future often feels daunting, especially when the stock market seems so unpredictable. However, achieving financial security is possible with proper planning and smart investments.

What if you don’t have the time or knowledge to navigate market ups and downs? That’s where equity mutual funds can help. These professionally managed funds invest in the stocks of different companies, making it easier for you to enter the equity market without needing expert-level skills.

This article explains how equity mutual funds work and why they are a better option than directly investing in stocks.

What is an Equity Mutual Fund?

When you invest directly in stocks, you become a part-owner or shareholder of a company. This option works well if you have enough time and know-how to analyse the market. However, equity mutual funds are a smart alternative if you lack expertise or time.

Equity mutual funds pool money from multiple investors and invest primarily in stocks. A professional fund manager ensures these funds are diversified across various companies, balancing risks and returns.

Benefits of Investing in Equity Mutual Fund

• Gives high return compared to other mutual fund classes.

• Risk is high as money is invested primarily in equities.

• Funds managed by a professional fund manager with years of experience

• Helps you in portfolio diversification.

• Suitable for long-term wealth creation.

• Transparent investment process with regular disclosures.

• Regulated by SEBI, ensuring investor protection.

• Tax efficient instruments with various advantages.
  
  

What are the types of Equity Mutual Funds?

Based on the market size:

• Large Cap Funds: This fund invests over 80% in large-cap companies (top 100), considered more stable than other mutual fund categories.

• Mid-Cap Funds: The fund house invests around 65% of the fund in mid-cap companies (101-250th companies in market cap), which gives a high return but comes with more risk.

• Small-Cap Fund: This fund invests primarily in small-cap companies (251st companies in market cap and beyond). It is more volatile in the long term. Although it gives a higher return than large-cap and mid-cap funds, it comes with high risk.

• Large and Mid-Cap Funds: These funds invest in large and mid-cap companies. They are suitable for investors wanting a high return with less volatility.

• Multi-Cap Funds: This investment route mixes large-cap, mid-cap, and small-cap funds. Fund managers rebalance the funds to match investors' objectives correctly.
  
  

What are the types of Equity Mutual Funds?

Based on the market size:

• Large Cap Funds: This fund invests over 80% in large-cap companies (top 100), considered more stable than other mutual fund categories.

• Mid-Cap Funds: The fund house invests around 65% of the fund in mid-cap companies (101-250th companies in market cap), which gives a high return but comes with more risk.

• Small-Cap Fund: This fund invests primarily in small-cap companies (251st companies in market cap and beyond). It is more volatile in the long term. Although it gives a higher return than large-cap and mid-cap funds, it comes with high risk.

• Multi-Cap Funds: This investment route mixes large-cap, mid-cap, and small-cap funds. Fund managers rebalance the funds to match investors' objectives correctly.
  
  

Based on Investment Style:

• Value/Contra Funds: These funds invest in undervalued stocks with potential for price appreciation, often taking positions contrary to current market trends.

• Dividend Yield Funds: These focus on stocks that pay high dividends relative to their market price, offering regular income alongside growth potential.

• Sectoral/Thematic Funds: These funds concentrate investments in specific sectors (like banking, pharma, IT) or themes (like consumption, infrastructure), allowing targeted exposure.
  
  

Tax Saving Scheme:

• Equity Linked Savings Scheme (ELSS): This equity scheme gives you a tax benefit of around 1.5 lakh under Section 80C of the Income Tax Act. More than 80% of funds are allocated to the equity and have a lock-in period of 3 years.

Other Equity Funds:

• Non-Tax Saving Equity Funds: Apart from ELSS, all funds are non-tax saving schemes in which capital gain tax is applied.
  
  

How is Equity Mutual Fund Different from Direct Stock Investing?

Cons of Investing in Equity Mutual Funds

• Management Fees and Expenses: Investing in a mutual fund requires management fees and other expenses. A point increase in management fee costs you more and decreases your overall return.

• Limited Control: Being managed by a professional fund manager means less control over your fund.

• Market Risk: Economic risks like political turbulence or natural disasters affect your investment.

• Potential for underperformance: Sometimes equities yield a lower return than another route. This happens mostly when the management fee is high or their expectations are wrong.

• Tax Efficiency: Frequent buying and selling leads to capital gain distribution, decreasing overall profit.

Equity mutual funds are a great choice for long-term wealth creation. They offer professional management, diversification, and higher returns. Large-cap funds are ideal for those seeking stability, while small-cap funds are suitable for investors willing to take on more risk for potentially higher returns.

By understanding your financial objectives and risk appetite, you can invest smartly in equities. To get started, download the HDFC Bank SmartWealth App from the Play Store or App Store and take your first step towards financial growth.


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