What is Equity Mutual Funds

The Significance, Meaning, Scope, and Features of Equity Mutual Funds

When we think of investments – we can think of traditional ways of investing through the bank or investing in Real Estate, Gold, etc., or we could take the plunge and invest in the stock and share market.

Even when investing in market funds, there are three kinds – equity funds, debt funds, and hybrid funds. Here we will talk about equity funds and their basic features, benefits, and types!

What Is an Equity fund?

An equity fund's meaning is an investment fund that invests primarily in corporate stocks or shares. Investing in equity funds is to gain the benefits of professional management and diversification based on individual investment objectives.

Equity funds have an excellent potential for long-term wealth accumulation and thus become the most suitable investment option for capital appreciation. Investors who want to invest in the long term earn rewarding returns, can take risks, bear with the volatility and market fluctuations, participate in the stock market and invest in equity funds.

The key goals of investing in equity funds are:

• Generation of long-term wealth
• Stock market exchange and exposure
• Meet Long-term financial goals

Who Should Invest in an Equity Fund?

Before you invest in equity funds, you must understand your long-term and short-term objective, risk- appetite, and investment horizon. Equity funds are for those investors who want to meet long-term goals with their investments.

Suppose you can take the risk of the current market volatility and withstand the pressure of the ever-changing stocks and shares with an expectation of high returns in the future. In that case, investing in equity mutual funds is wise. These investments give time to counter market movements and volatility.

Types of Equity Funds

The broad categories of equity funds are:

Based On Investment Style

1. Active Funds - Expert, experienced, consistently managing these programs, and professional fund managers who carefully select the stocks they invest in.
2. Passive Funds - These programs typically track a market index or segment that determines the list of stocks in which the program invests. Fund managers do not actively participate in-stock selection in these programs.

Based On Market Capitalisation

Large-Cap Funds

A large-cap fund invests at least 80% of its assets in stocks of established companies with a proven record in large-capitalization stocks (top 100 companies by market capitalization). These funds are more secure and have the potential to generate reasonable returns.

Mid-Cap Funds

A mid-cap fund invests at least 65% of its assets in the stocks of mid-cap companies (between 101 and 250 companies by market capitalization). These stocks are relatively more volatile than large-cap funds but can generate higher returns.

Small-Cap Funds

A small-cap fund invests at least 65% of its assets in the stocks of small-cap stocks (251 or more companies by market capitalization). These funds can generate more decent returns than large- and mid-cap funds, but they are also more volatile.

Multi-Cap Funds

Multicap funds invest in large, mid, and small-cap stocks depending on market conditions. This allows investors to venture into diversified portfolios across the entire market cap.

Large Cap/Mid Cap Funds

The large and mid-cap fund invests at least 35% of their assets each in both large-cap and mid-cap. The remaining 30% is invested in other securities or money market instruments approved by SEBI.

Other Categories

Sector Funds

Equity funds that invest at least 80% of their assets in stocks in specific industries to benefit investors when specific sectors are growing, such as FMCG, pharmaceuticals, technology, banking, and financial services, are classified as sector funds.

Focus Funds

A Focus Equity fund invests at least 65% of its assets in equities and equity-related products and invests in up to 30 shares of various market capitalizations.

Thematic Funds

A thematic fund is a diversified mutual fund that invests at least 80% of its assets in stocks that revolve around a specific theme, such as social concerns, government schemes, or environmental concerns.

Contra Funds

A contra fund invests a minimum of 65% in underperforming or depressed assets at the current time, which are expected to rise in the future.

Tax Savings Fund

These funds include Equity Linked Savings Scheme or ELSS Funds, which provide tax benefits up to INR 1.5 lakhs (for an individual and his HUF) under Section 80C of the Income Tax Act.

The tenure of such funds is a minimum period of 3 years, and these help in saving taxes and contributing to capital appreciation.

Characteristics And Benefits Of Investing In Equity Funds

The salient characteristics and advantages of investing in equity funds are listed below:

Low Expense Ratio

The expense ratio is a critical factor that affects your returns. SEBI has restricted the expense ratio for equity funds to 2.5%, which can even be further reduced depending on the demand and market conditions. Regular trading stocks with a low expense ratio in equity funds means more returns for investors.

Better Inflation-Adjusted Returns

Equity funds can offer higher inflation-adjusted returns because returns are market-linked. Equity funds offer an opportunity to grow an investor's long-term capital savings properly.

Comfort and Convenience

Investors have the option to initiate lump sum investments, STP (Systematic Transfer Plan), SIP (Systematic Investment Plan), and SWP (Systematic Exit Plan). It becomes easy to invest, redeem or move to another scheme to facilitate the transfer of shares.

Portfolio Diversification

You have the advantage of entering into diversified portfolios and investing in various profiles for exposure to different sectors of the economy. You can also invest in the entire market cap. This means lower risk and better performance of your equity funds.

Professional Management

Expert fund managers with vast experience in equity funds manage your portfolio and invest in assets that can be favourable for the investor based on their investment goals. The managers monitor investment opportunities and give enough exposure to investors in the equity mutual funds market.

Tax Exemptions

Investing in ELSS (Equity Linked Savings Scheme) entitles you to tax benefits of up to 1,50,000 (for individuals and HUF) under section 80C of the Income Tax Act. It is one of the shortest tax savings available, with a three-year vesting period.

Tax on Equity Mutual Funds

If the returns received on an equity fund are for less than one year by him, the gain will be calculated as his STCG (Short Term Capital Gains) and taxed at 15%.

If the holding period exceeds 1 year, the profit or return is calculated as LTCG (Long Term Capital Gains) and is taxed at 10% on profits over Rs. 1 lakhs in any financial year.

About SIPs

Investors, especially the new ones, have the option to start small. Anyone can invest in stock funds via his SIP for as little as INR 500 per month.

How To Start a SIP?

Step 1 – You can start by choosing a SIP system that fits your investment horizon based on your risk appetite and decide the amount you can easily invest every month.

Step 2 – You must go through KYC compliance by supplying important documents like your Aadhar card and PAN card.

Step 3 - Select the SIP date and duration.

Step 4 – You can choose the frequency based on your cash flow.

Step 5 - Submit the form online or offline to initiate SIP.

The Best Equity Mutual Funds - Overview Of Indian Equity Funds

In general, equity funds generate returns of around 10-12% (before tax). Choosing the right program can go a long way toward getting a healthy return on your investment. Here is a list of the best equity mutual funds based on returns over the last 5 years.

List of Top Performing Equity Mutual Funds in India

Conclusion

Knowing substantial factors about equity mutual funds is critical before you invest your money in them. Undoubtedly, the investments are risk-oriented, but with great risks come high returns. So, if you are ready to take risks, equity fund investments are the best for you.

You can invest through a fund house that pools money and invests it in an equity fund after thorough research. Fund managers have the expertise and experience to allocate your funds to the right equity shares. Still, you must also know about the functioning of stock funds, the fund's asset allocation, expense ratio, and investment strategy, as all these factors affect returns.

Frequently Asked Questions

What are equity mutual funds, and how do they work?

Equity mutual funds are of various sorts, but in most of them, 65% of the assets are invested in stocks of various companies. The fund managers allocate these assets based on your investment objectives and risk-taking capabilities.

Is it wise to invest in equity mutual funds?

Equity fund investments are an excellent option if you want high returns from your invested funds. These investments generate long-term capital growth and reasonable inflation-adjusted returns through exposure to the stock market.

What are SIPs?

SIPs are Systematic Investment Plans through which you can invest a fixed amount monthly in a mutual fund scheme. In return, you get units of a company's stocks, which can generate long-term benefits from high returns. SIP is a continuous and consistent investment; you don't need to time the market when investing in them.

What is the difference between an equity fund and a debt fund?

Equity mutual funds are riskier than debt funds but also generate better returns than the latter. In equity, you can invest primarily in corporate stocks. In contrast, in debt funds, you can primarily invest in fixed-income securities such as bonds, commercial paper (CP), certificates of deposit (CD), and other debt securities.

Who Should Invest in Equity mutual funds?

Investors with high-risk tolerance, a broader investment horizon, and looking for long-term capital growth can invest in equity mutual funds.