​​​

What are equity Mutual Funds?

image

Equity Funds are mutual fund schemes which invests their assets in stocks of different companies based on the investment objective of the underlying scheme. These funds are a great investment option for capital appreciation as they have the potential for long term wealth creation. Investors looking to invest for long term and who want to gain exposure to the stock market can choose to invest in equity funds.

  • long-term potential

    Potential for long term wealth creation

  • expo-stock-market

    Exposure to stock markets

  • long-term goals

    Ideal for long term goals

Types of equity Funds

There are a variety of equity mutual funds available for investors to invest in. The choice of scheme should depend on the investment objective, risk profile and the investment horizon of the investor. The broad categories of equity funds are-

Large Cap Funds

Large Cap Funds invest a minimum of 80% of their assets in equity shares of large cap companies (Top 100 companies in terms of market capitalization). They invest in well established companies with a proven track record. These funds are capable of providing potentially reasonable returns and are relatively less volatile compared to mid cap and small cap funds.

Mid Cap Funds

Mid Cap Funds invest a minimum of 65% of their assets in equity shares of mid cap companies (101-250 companies in terms of market capitalization). They are relatively more volatile than large cap funds but have the potential to generate better returns than them.

Large and Mid Cap Funds

Large and Mid Cap Funds invest a minimum of 35% of their assets in both large cap companies(Top 100 companies in terms of market capitalization) and mid cap companies(101-250 companies in terms of market capitalization). The remaining 30% of the assets can be invested in equities other than large and mid cap and/or debt and money market instruments and such other securities as may be permitted by SEBI.

Small Cap Funds

Small Cap Funds invest a minimum of 65% of their assets in equity shares of small cap companies (251 and above companies in terms of market capitalization). These funds have the potential to give reasonable returns than large cap and mid cap funds but are also more volatile than them.

Multi Cap Funds*

Multi Cap funds invest in Large Cap, Mid Cap and Small Cap companies according to the relevant market conditions. This gives the investors an opportunity to invest in a diversified portfolio across market capitalization.

*As per SEBI Circular No. SEBI/HO/IMD/DF3/CIR/P/2020/172 dated September 11,2020, Multi Cap funds have to invest a minimum of 25% in large cap, 25% in mid cap and 25% in small cap companies w.e.f January,2021.

Equity funds that invest a minimum of 80% of assets in stocks of a particular sector such as FMCG, Pharma, Technology, Banking & Financial Services etc. come under sector funds. These funds allow a concentrated exposure to a particular sector which can be beneficial to investors when a particular sector is experiencing growth.

Thematic funds are mutual fund schemes which invest a minimum of 80% of its assets in stocks revolving around a particular theme such as ESG (Environmental, Social, Governance), Consumption, Equity Minimum Variance. Thematic funds are considered to be more diversified than sector funds as they can invest in multiple sectors based on a particular theme.

A focused equity fund invests a minimum of 65% of its assets in equity and equity related instruments and invests in maximum 30 stocks across market capitalization.

Contra fund follows a contrarian strategy of investment which invests a minimum of 65% of its assets in equity and equity related instruments. This fund invests in stocks which are currently out of favour with a belief that over the long term, these stocks would gain value and perform better.

ELSS fund (Equity Linked Savings Scheme) is a scheme which allows tax benefits upto ₹1,50,000 (For Individuals and HUF) under Section 80C of the Income Tax Act. These funds provide opportunities for capital appreciation along with tax benefits. It has a lock-in period of 3 years.

Benefits of Equity Funds - Why invest in equity mutual fund?

  • first-beefit
    Diversification

    Equity funds allow investors to invest in a diversified portfolio which is exposed to different sectors of the economy. It also allows investment across market capitalization. This reduces the risk as compared to investing directly in stocks as the underperformance of some stocks can be offset by the outperformance of other stocks.

  • first-beefit
    Better inflation adjusted returns

    Compared to traditional investment avenues, equity funds have the potential to generate better inflation adjusted returns as the returns are market linked. Equity funds provide opportunities to reasonably grow investors’ capital over the long term.

  • first-beefit
    Expert Management

    Equity funds are professionally managed by fund managers who constantly track investment opportunities in the market while striving to mitigate risk. This makes investments in equity funds a good option for investors who want to gain exposure to the equity market.

  • first-beefit
    Convenience

    Investors have the convenience of starting a SIP (Systematic Investment Plan), SWP (Systematic Withdrawal Plan) and STP (Systematic Transfer Plan) making it easier for investors to invest, redeem or transfer their units to another scheme easily.

  • first-beefit
    Tax Benefits

    Investments in ELSS (Equity Linked Savings Scheme) allows tax benefits upto 1,50,000 (For Individuals and HUF) under Section 80C of the Income Tax Act. It has a lock-in period of 3 years which is currently one of the shortest among tax saving instruments.

  • first-beefit
    Start Small

    Anyone can start investing in equity funds through SIP with as low as INR 500 per month.

Equity Mutual Fund Taxation*

If the units of the scheme are held for less than 1 year, then the gains are calculated as STCG(Short Term Capital Gain) and are taxed at 15% and if they are held for more than 1 year then the gains will be calculated as LTCG(Long Term Capital Gain) and will be taxed at 10% on gains exceeding one lakh rupees in a financial year.

* Plus surcharge & health and education cess as per Income Tax Act.

(Note – In view of individual nature of tax consequences, investors are advised to consult their financial advisor / tax consultant before making any investment decision)

Equity Funds FAQ

Equity funds invest at least 65% of their assets in stocks of different companies based on the nature of the fund. The asset allocation will be according to the investment objective of the scheme.

Equity funds are a good investment option for investors who are looking for long term capital appreciation through exposure to the equity market. They have the potential to generate reasonable inflation adjusted returns as compared to traditional savings instruments.

Equity funds invest primarily in stocks of companies whereas debt funds invest primarily in fixed income securities such as Bonds, Commercial Papers (CP), Certificate of Deposit (CD), T-bills, government securities and other debt instruments.

Investors looking to generate long term capital appreciation can look to invest in equity funds. The choice of scheme should depend on the risk appetite, investment horizon and investment objective of the investor.

  • Step 1 - Define your investment goals and then based on risk appetite choose a scheme according to your investment horizon.
  • Step 2 - Make sure that you are KYC compliant.
  • Step 3 - Choose the date and the duration of the SIP.
  • Step 4 - Choose the amount which you want to invest in the scheme on a regular basis (select the frequency based on your cashflows).
  • Step 5 - Start the SIP by submitting the form online or offline.