You must have heard about the various types of funds you can invest in within your ULIP. These typically include liquid, equity, debt, and balanced or hybrid funds. While it is advised to diversify your portfolio through multiple funds to spread out your risks, you should know more about every fund type before investing. With that purpose, let us delve deeper into equity funds and how they help.
ULIP Equity Funds
Using any ULIP plan calculator will give you an idea about the expected returns over a certain period. However, there are no guarantees since ULIPs are market-linked instruments. Hence, you should always be careful while choosing the funds to invest in. These funds usually deploy investments in large, mid-cap and small-cap equity funds. They come with higher risks of market fluctuations, value erosion, and other shifts. Therefore, it is only advisable if you have a higher appetite for risk. At the same time, only investing in debt funds will give you lower risks and lower returns. Hence, striking a balance by adopting the right strategy is essential.
A Basic Guide to Equity Funds
Equity funds majorly deploy investments in stocks of multiple entities/companies for generating returns for investors. These are high-risk investments, although they have the potential to generate high returns as well. Allocations of funds are made across mid-cap, small-cap, and large-cap entities. Equity funds are better for achieving goals in the long term since they usually tend to offer better returns and performance in such cases.
Types of Equity Funds
Here is a guide to the various kinds of equity funds that are available in the market today-
- Small-cap funds – These deploy investments in companies that rank higher than 250 with regard to their entire market capitalization, based on the guidelines issued by SEBI. These are riskier compared to other large-cap or mid-cap equity funds, although they may also ensure comparatively higher returns.
- Mid-cap funds – These are funds that make investments in companies ranking between 101 and 250 in terms of their full market capitalization. These have comparatively lower risks than small-cap funds, although the risks are higher than their large-cap counterparts.
- Large-cap funds – These funds make investments in companies ranking between 1 and 100 with regard to their entire market capitalization. They usually have the lowest risk levels as compared to mid-cap and small-cap funds.
- Large and Mid-cap equity funds – These are funds that divide allocations equally between large and mid-cap equity and other related market instruments while having immense potential for ensuring higher returns in the future.
- Multi-cap funds – These are funds that deploy investments in stocks throughout small-cap, mid-cap, and large-cap entities. Based on the prevailing market conditions, the fund manager will decide on the investments to be made in this case.
In addition to this categorization, the investment strategy employed by the fund manager may also determine the type of fund. Equity funds can be categorized as having one of the following investment strategies:
- Top-Down Strategy – In this blueprint, fund managers first select a particular industry or sector. After that, the stocks for the same are bought within the portfolio.
- Bottom-Up Strategy – This strategy covers stocks purchased after conducting thorough research, irrespective of the industry or sector they deal with.
- Growth Strategy – This blueprint covers scenarios where funds deploy investments only in companies with consistent or steady track records of attaining profitability. These entities have high future growth prospects and the likelihood of sustaining the same.
- Value-based Strategy – These deal with funds that deploy investments in companies with immense future growth potential. These are also companies that have stocks available at lower values presently in the market.
While investing in a ULIP, you will find several kinds of funds which are balanced or hybrid funds. They combine investments in both equity and debt to diversify investor portfolios and ensure lower risks at the same time. For example, some may have 60-70% invested in equity funds and the remainder in debt funds, while others may allocate more to debt as per the changing preferences of investors.
When should you align more toward equity?
If you are in the early stages of your ULIP investment and do not have any family commitments or liabilities, then you can invest more in equity. This will help you grow and compound your wealth, at least in the initial lock-in period. Then, once your financial responsibilities increase and you get married, you can start looking at long-term goals and spreading out your risks between debt and equity.
Once you get married, have a child and start planning for their future, you may choose to have a minimal amount in equity and the rest in debt funds. On the other hand, if you have a higher appetite for risk and wish to grow wealth over the long haul throughout your working years, then you may keep equity as the core component of your portfolio over the entire tenure of the ULIP as well.
