Investment preferences of retail consumers have evolved since the inception of Mutual Funds. There are different types and categories of funds regularised by the Securities & Exchange Board of India (SEBI). One of the most preferred category is Equity Mutual Funds, owing to potentially high returns they can provide. In this article, you will explore the different benefits, objectives and characteristics of Equity Mutual Funds.
What are Equity Funds?
The type of Mutual Fund schemes investing their assets into shares/stocks of different companies across market capitalisation, with an objective of generating higher returns are called Equity Mutual Funds. As regulated by SEBI, equity oriented funds invest at least 65% of the corpus into Equity related instruments and a minimum of 10% into debt. These funds are known for generating better returns as compared to debt funds but riskier due to the dependency on market conditions.
List of 10 Best Equity Mutual Funds to Invest in 2020
Given below is a list of best equity mutual funds for 2020:
|Fund Name||1-Year Returns||3-Year Returns||5-Year Returns|
|Mirae Asset Emerging Bluechip Fund||18.24||16.09||16.42|
|SBI Small Cap Fund||10.75||14.62||15.79|
|Invesco India Financial Services Fund||24.68||20.26||15.3|
|Axis Focused 25 Fund||18.31||18.81||13.84|
|Tata Retirement Savings Fund||16.14||16.6||13.02|
|Canara Robeco Emerging Equities Fund||12.26||13.93||12.93|
|Tata India Tax Savings Fund||18.29||14.76||12.76|
|Motilal Oswal Multicap 35 Fund||9.24||11.35||12.6|
|SBI Focused Equity Fund||20.98||15.78||12.47|
|Mirae Asset Large Cap Fund||15.41||15.26||12.25|
*Data as on 11th December 2019; Source: Value Research
Different Types of Equity Mutual Funds
These funds are classified according to the investment preferences of the investors:
1. On the basis of Market Capitalisation
According to the capital of the company, equity schemes are divided into-
- Large-Cap Funds: The investment schemes investing 80% of the assets into shares/stocks of companies with large capital (the top 100). These companies perform more consistently than mid-cap and small-cap companies
- Small-Cap Funds: The funds investing 65% of the total assets into shares/stocks of companies which have a small capital and are listed at 251st or below according to market capitalisation. These are highly volatile funds but offer good returns in comparison to large & mid-cap schemes.
- Mid-Cap Funds: Funds with 65% assets allocated into mid-cap companies (placed between 101 to 250 in market capitalisation). These schemes give better returns than large-cap funds but are more volatile as well.
- Multi-Cap Funds: The schemes investing in large-cap, small-cap and mid-cap funds in a wavering proportion. It is the responsibility of the respective fund manager to rebalance and reallocate assets according to market fluctuations
2. On the basis of Investment Strategy
According to the strategy of investment into Mutual Funds, schemes are further divided as-
Sectoral Funds: The mutual funds which place the assets into particular sectors such as Infrastructure, Technology, FMCG, Real Estate etc, are called sectoral funds.
- Thematic Funds: The pattern of investment oriented with an overall theme with allocation into multiple sectors are called thematic funds. Some examples of thematic funds are- Emerging Businesses Funds, International Stocks etc.
- Focused Funds: These schemes follow a focused pattern by investing in a maximum 30 stocks of a particular company
- Contra Equity Fund: These schemes analyse, evaluate and invest in the stocks which are under-performing with an assumption that these stocks will regain in the long term
3. On the basis of Tax Treatment
- ELSS: Equity Linked Savings Scheme (ELSS) is a tax-saving equity fund with a lock-in period of 3 years. ELSS works under a mandatory rule of having at least 80% of assets allocated into equities
Why one should invest in Equity Mutual Funds?
There are certain benefits tagged along the investments made into equity schemes, for the investors willing to place their resources into these funds-
- Diversified Portfolio – To minimise the intensity of risk, the investments are exposed to different sectors across capitalisation. Indulging in a diversified portfolio is always prudent because during bearish market situations, even if some stocks undergo depreciation, the stocks outperforming make up for the losses.
- Professional Management – Every Mutual fund scheme is monitored by a professional manager, with enough knowledge of the functioning of the market. The fund manager undergoes critical analysis and makes crucial decisions about asset placement to meet the goals of the scheme.
- Higher Returns – Equity Mutual Funds are known for accruing higher returns than debt funds. According to historical returns, the investment directed towards equities has always delivered inflation beating returns. The investment value witnesses instant appreciation as and when the price of stocks rise.
- Tax Saving – There are tax saving and non-tax saving equity funds. Equity Linked Savings Schemes (ELSS) are tax saving mutual funds offering tax exemption of up to Rs.1.5 Lakh under Section 80(C) of the Income Tax Act, 1961. The subscribers can also save up to Rs.46,800 in taxes.
- Investment costs are low – One can start investing into equity schemes with a nominal cost of Rs.500 per month via Systematic Investment Plan (SIP). Moreover, as updated by the Securities & Exchange Board of India (SEBI), the expense ratio of 2.5% applied on equity funds are going to be reduced in the near future
- Income from Dividends – Extra income can be earned by the subscribers in the form of dividends as and when the equity funds deliver the same
- Liquidity and Convenience – Availability of SIP and Lump sum option makes the investment process convenient. Moreover, it is very easy to redeem units of mutual funds in need. The investors are free to redeem their share of units and the corpus gets credited to the respective bank account within a week
Who should invest in Equity Mutual Funds?
Not all Mutual Fund schemes are suitable for all investors. There are certain parameters which define the compatibility of a particular scheme for a particular investor. Likewise, Equity Mutual Funds are suitable for investors:
- If are looking for long-term investment options i.e, 3 years or more. Long term investments give the fund enough time to perform well
- You are a new investor and are yet to be familiar with the market and its functioning, opt for large cap equity funds. This is because large cap funds invest the assets into stocks/shares of top 100 companies that are well-established organisations with sustainable business plans. These organisations are less affected by market fluctuations and perform consistently during market fluctuations accruing stable returns
- If you are seeking tax-saving investment options but also looking for higher returns than traditional savings instruments. ELSS are recommended for such investors as these schemes are exempted from tax deductions under Section 80(C)
- Investing in diversified Equity funds are also good options for individuals with a good knowledge of the intricacies of the market functions. These Funds invest in the shares of different companies across market capitalisation to give the fund portfolio a fair chance of getting higher returns under less risks as compared to small/mid cap equity funds
Things to be considered before investing
- What is the Financial Goal? Always draw a target/goal for which you want to invest. Now, keeping your financial goal in mind, evaluate and choose the best investment option which is perfectly aligned. Equity mutual funds are mainly considered beneficial for long-term investment goals
- Performance of Funds- The overall performance can be judged over a period of time by reviewing certain factors such as historical returns and CRISIL Rank of the fund. Historical Returns can help investors decide whether a scheme is worth investing in or not. Equity Funds are recorded as the highest returns delivering category of Mutual Funds.
- Risks Involved- Mutual funds are subject to market risks. The intensity of risk involvement & the risk appetite of the investor defines the investment stance. Equity Mutual Funds are considered riskier than other fund types. However, Diversified Equity Funds are less risky because of the non-focused portfolio.
- What is the Lock-in Period? One must consider the lock-in and holding period before planning investments into any of the funds. Equity Funds is not suitable for investors who are looking for short-term investment options because they have a lock-in period of three years
- Asset Management Company and Fund Managers- There are different Asset Management Companies(AMC) with numerous underlying Mutual Funds. The Fund Managers plan the investment strategy and asset allocation for every fund. One should always choose a fund which comes under a reliable, well-established fund house and is monitored by a professional Fund Manager
- What are the Costs Involved? Expense Ratio, Entry Load and Exit Load are some of the costs one should be aware of when purchasing and redeeming Mutual Fund units. It is imperative for an investor to review and compare these costs
- Other Portfolio factors: Other factors such as the fund NAV (Net Asset Value), AUM (Assets under Management), CRISIL Rank etc. must be taken into consideration before finalising the investment strategy.
What is the Taxation Policy for Equity Mutual Funds?
- When the units of the scheme are held for at least one year, the capital gains are called Short-Term Capital Gains (STCG). These Capital gains are taxed at 15% on holding of investment for up to 1 year.
- On holding the investments for more than 1 year, the returns are exempted from tax payment
- When the units of the scheme are held for one year or more, the gains are called Long-Term Capital Gains (LTCG). LTCG more than 1 Lakh are taxed at 10% without the benefit of indexation.
Which is the best mode of investment- SIP or Lump Sum?
Lump Sum investment refers to investing the entire amount in one go whereas Systematic Investment Plan (SIP) enables individuals to invest a fixed amount of money at regular intervals.
- Investing the entire amount can benefit the investors over a period of time but it is not feasible for every investor to lock in or conjure up huge sums of money at once. However, SIPs can be started with a nominal cost Rs.500 per month. Lumsum investments are also better suited for debt funds or other kinds of funds.
- Lump sum investments must be made at the right time to obtain maximum returns. Otherwise, the returns may turn out to be less.
- SIPs are not just convenient but they also give the investors the rupee cost averaging advantage. During bullish market conditions, investors are allocated with fewer units. Whereas, during bearish market, investors get more units.
How to Invest online in Equity Mutual Funds?
- Sign Up/Sign In to Paisabazaar.com and go to ‘Direct Funds’
- Click on the section of ‘Equity Funds’
- Select the fund in which you want to invest and look at the details. You can also compare similar schemes as well as use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment.
- Click on ‘Invest Now’, select either Lump sum or SIP
Why choose Paisabazaar?
- Trusted website, no commission charges and no paperwork
- You can compare more than 1,700 Funds at one platform instead of visiting the website of each AMC and then searching for numerous funds
- Easy to browse as Funds are segregated under Equity, Debt, Large Cap, ELSS, etc. You can further add filters of ratings, returns, fund houses
- Important scheme details such as latest Net Asset Value (NAV), expense ratio, assets under management, etc are also available on the portal, making it easier for consumers to pick a suitable fund.
Frequently Asked Questions (FAQs)
Q. What is Net Asset Value (NAV) of a scheme?
Ans: Net Asset Value (NAV) refers to the value of the assets of the scheme after deducting the value of its liabilities per unit. It is also the price at which one can buy or sell the units of the scheme.
Q. What is Exit Load?
Ans: Exit load refers to the cost which the investor has to pay in case of premature redemption or withdrawals from the scheme. Usually, 1% exit load is applied to Equity Mutual funds in case of redemption before completion of 1 year of investment. In an ELSS the SIPs are locked-in for three years and redeeming them is not possible before this period. An exit load, as such, is thus not applicable.
Q. What is expense ratio?
Ans: Expense ratio refers to the cost charged by the companies from investors to manage a mutual fund or exchange-traded fund (ETF).
Q. What is a Systematic Investment Plan (SIP)?
Ans: Systematic Investment Plan (SIP) refers to a mode of investing into Mutual Funds wherein the investors are allowed to make investments in previously set amounts at regular periods instead of a one-time lump sum option.
Q. Are equity funds safe?
Ans: There is a certain level of risk involved in every fund. Equity Funds, for that matter, are known to be safer than other fund types. Long-term investment into Equity funds are safer than short-term investment because it gives enough time for the investment to give higher returns. Also, large-cap equity funds are one of the best investment options because investing into companies with large capital helps the fund to mitigate market fluctuations and perform consistently.
Q. Where can I find Equity mutual funds to Invest in?
Ans: To find the best Equity Mutual Funds, you can simply log in to Paisabazaar which gives you a detailed and analysed view of schemes. On Paisabazaar.com, start a direct search for Equity Funds after which you will be redirected to a complete list of suitable funds. You can compare different funds to get the best returns.
Q. What is the difference between Equity Investments and Equity mutual fund?
Ans: Equity investments refer to the purchase of shares/stocks of a particular company from primary (public offerings) or secondary market and might require a demat account in order to trade. Purchasing shares of a company gives you shared ownership to the individuals. On the other hand, Mutual Funds allow you to buy units of funds which is actually investing in different companies selected by the fund manager; no stakes are owned by the individuals in Mutual Funds.
Q. How do I choose the best equity mutual fund?
Ans: There are numerous Equity Funds which makes the investing decision difficult. However, to choose the best equity mutual fund, you can focus on some basic factors such as- Expense Ratio, Financial Goal, Risk Tolerance and Risk Involved, High Turnover Ratios, Assets Under Management (AUM), Net Asset Value etc. These factors help the investors in evaluating the fund’s ability to perform during market fluctuations.
Q. What are the best equity mutual funds to invest in?
Ans: Some of the best equity mutual funds and ELSS are:
Mirae Asset Emerging Bluechip Fund
SBI Small Cap Fund
Invesco India Financial Services Fund
Tata Retirement Savings Fund
Tata India Tax Savings Fund
L&T Tax Advantage Fund
DSP Tax Saver Fund
Q. Is it a good time to invest in equity funds?
Ans: Yes, you can invest in equity mutual funds now and get good returns. But, for that it is advisable to invest via Systematic Investment Plan (SIP) and have an investment horizon of at least 10 years.
Here is a List of Other Equity Mutual Funds you can Invest in FY 2020: