Equity Plus Fund - Definition & How it Works?

An equity plus fund is a type of mutual fund that aims to generate inflation-indexed returns in the long run or generate alpha by beating its benchmark index. While an equity plus fund primarily invests in equities , it can also take some exposure in corporate bonds and government securities if required.

Investing in equities, an equity plus fund invests as per the fund mandate and its desired objective. The fund manager, managing the fund, controls risk by avoiding being adventurous, thereby ensuring that the fund meets its objective. You can find out more about the mandate in the investment literature of the fund.

If you are an aggressive investor with high-risk tolerance, you can invest in an equity plus fund. In other words, in case you can stomach volatility, you can opt for this fund. Also, if you are building a corpus for long-term goals such as higher education of children, their marriage or your retirement.This is because equities, as an asset class, has the potential to deliver inflation-beating returns in the long run. However, if you are investing in an equity plus fund, make sure to remain invested for the long haul as equities tend to deliver the desired returns only when you remain invested for the long term.

You can invest in an equity plus fund in two ways – lump sum or through a systematic investment plan (SIP) . In the former, you can invest a large amount at one go, while in the latter a pre-determined amount is deducted from your bank account and invested in the chosen fund.While SIPs inculcate a disciplined savings habit, lump sum comes handy in case you have an investible surplus. If you are investing for the first time, you need to be KYC-compliant.

Before investing in an equity plus fund, it’s essential to check out the long-term performance of the fund. See how the consistency of returns generated by the fund and find out how it has performed in a bear market. It the ability of a fund to contain losses during a bear phase that reflects its true character.Also, while investing in an equity plus fund, check out its holdings. Ideally, it shouldn’t be concentrated towards a single sector and should invest in stocks of fundamentally-sound companies. This will ensure the fund sustains during a tough time.

Yes. As you may already be aware, there are different kinds of mutual funds. Investing options include debt, equity, and hybrids of the two. Stock market investments made through mutual funds are included in equity fund investments. Equity funds have the greatest possibility to deliver exceptional returns of any mutual fund kind. They do, of course, also carry a certain amount of risk. Therefore, equities mutual funds are best suited for investors with larger risk tolerance. Here are the best reasons to invest in equity funds.

A) Diversification

The term "diversification" refers to the division and investment of a fund into various or diversified portfolios . This implies that your stock market investment does not totally fund one company or a particular class of company. You run the danger of losing everything you invested if the company experiences losses.

B) Greater capital growth

Analyzing the kind of growth you desire is a useful next step if you intend to invest in mutual funds but aren't sure whether to choose equities or debt funds. Equity funds outperform debt funds in terms of capital appreciation rate, yielding a higher rate of return.

C) Beneficial for tax savings

Additionally, tax savings are possible when investing in equity mutual funds. Tax-saving mutual funds include ELSS or equity-linked savings schemes . Investments made in ELSS offer tax benefits up to Rs. 1.50 Lakh annually under Section 80C of the IT Act. Additionally, up to Rs. 1 Lakh of long-term capital gains are excluded from taxation for ELSS funds.Furthermore, ELSS has the lowest lock-in time of three years when compared to other investment instruments covered under Section 80C, such as Fixed Deposits as well as Public Provident Fund, making it one of the most widely used mutual fund investment options.

Here is how you can evaluate your equity mutual funds.

1) Investment Return

The most important factor for rating or choosing funds is believed to be fund performance pertaining to return on investment. Investors may consider returns spanning over a certain time frame, such as five years. Funds that routinely outperform their benchmark indices can be chosen. Over the longer time periods, they ought to perform about as well as their peer group.

2) Fund Background

Prior to investing in a fund, you must ensure that it is actively managed by a reputable fund firm. You need to have faith in your management firm. The ideal fund firm should also have a proven track record of success in the previous four to five years. It guarantees that your chosen fund has witnessed several market slumps and rallies.

3) Expense Ratio

The annual expenditure caused by funds, represented as a percentage of their average net asset, is known as the expense ratio. Mutual funds demand investors an expense ratio in exchange for managing their money.

4) Financial Ratio

The considerable hazards involved make the risk-return ratio a crucial issue. The Sharpe Ratio, a crucial performance indicator for equity funds, is used to evaluate this. It provides an indication of risk-adjusted return. It stands for the extra return the fund offers for a specific level of risk. Simply put, the greater the fund's risk-adjusted return, the greater the Sharpe ratio.

Take a look at factors that an investor must consider before investing.

1) Financial Objectives

The best equity mutual funds seek to increase wealth through prudent investment. The equities that a person purchases are determined by their investment strategy, which can be either value or growth investing. By selecting inexpensive stocks, value investors can profit from rising stock prices.

2) Cost

To manage your investment, cost equity funds charge an expense ratio. SEBI has set a limit of 1.05% for the expenditure ratio. The expense ratios of actively managed equities funds are higher than those of index funds.

3) Funding Options

The only categories used to classify equity funds are large-cap, mid-cap, and small-cap funds. Small- and mid-cap mutual funds offer a higher risk-to-reward prospect than large-cap mutual funds . Multi-cap funds, on the other hand, invest in stocks that have a wide range of market capitalizations in order to maintain a well-diversified portfolio.

4) Timeline for Investment

Equity funds are appropriate for those looking to make long-term investments. The fund is prone to extreme short-term volatility. This variation can last for a few years on average.
As a result, the fund can provide returns ranging from 10% to 12%. For the equity mutual funds to perform to their full prospect, investors must be willing to hold their investments for at least the predetermined amount of time.

5) Risk

Market risk is the most important risk that equity funds must manage. Changes in an underlying benchmark have an impact on equity funds. The value of equity funds is affected by the index's overall growth and decline. Such volatility outperforms that of debt or money market funds.

6) Financial Goals

Equity mutual funds are the ideal option for achieving long-term financial goals, like wealth growth or retirement planning. Due to the high risk & high return characteristics of these funds, they can generate sufficient wealth, allowing you to retire early and pursue your passion.

A) Volatility Risk

Equity mutual funds are continually impacted by market fluctuations because they invest in equity and equity-linked instruments. The likelihood that changes in the market will have an impact on the fund's NAV is known as volatility risk.

B) Concentration Risk

The likelihood that the heavily invested sector in the fund would perform poorly is known as the concentration risk. There's no denying that during a bull run, placing your investments in a strong industry offers profitable results. However, unfavourable events will result in losses that are amplified.

C) Liquidity Risk

The probability that the fund management won't be able to sell the underlying securities without assuming a considerable risk is known as liquidity risk.

When investing in equity funds, consider your investment horizon as well as risk tolerance. These funds are suitable for investors with a long-term investment horizon. As a result, stock mutual funds should be avoided by short-term investors. If you want to save taxes, then investing in ELSS is recommended because investments in this fund are eligible for a tax deduction under Section 80C of the Income Tax Act of 1961.A beginner mutual fund investor may decide to invest in large-cap equity funds because these funds invest in equity shares of well-known companies that have a history of providing consistent returns over the long term. A seasoned investor, on the other hand, can decide to invest in diverse stock funds to balance the risk-reward ratio.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.