An equity mutual fund is a fund which predominantly invests its assets in shares/stocks. According to the Income Tax Act, an equity fund is a fund that invests at least 65% of its assets in equities. It can invest the balance 0-35% in debt or money market securities.
Types of Equity Funds
The Securities and Exchange Board of India (SEBI) has classified equity funds as under:
- Multi Cap Equity Fund: An open-ended equity scheme which invests at least 65% of its assets across large cap, mid cap, and small cap stocks and equity related instruments. Multi cap funds can provide relatively higher returns than other funds like large cap, mid cap, and small cap as they have the advantage of investing across the market. In a multicap fund, the fund manager rebalances between large, mid and small stocks and this is a lower-cost option than if you had to switch between large, mid and small cap mutual funds yourself. The latter option can involve exit load and tax, while the former does not.
- Large Cap Equity Fund: An open-ended equity scheme which invests at least 80% of its assets in the shares of large cap companies i.e.top 100 companies in terms of market capitalisation. Large cap funds help you maintain stability in your portfolio as they are less volatile than their mid and small cap counterparts. However, these funds generate relatively lower returns than small cap and mid cap equity funds.
- Large and Mid Cap Equity Fund: An open-ended equity scheme which invests at least 35% of its assets in large cap and 35% of its assets in mid cap stocks each. Since a large and mid cap fund invests in both large and mid cap stocks, it can give higher returns than purely large cap funds but potentially lower returns than pure mid cap, small cap or multicap funds.
- Mid Cap Equity Fund: An open-ended equity scheme which invests at least 65% of its total assets in mid cap stocks i.e. stocks which rank from 101st to 250th position in terms of market capitalisation. These funds are tend to provide relatively higher returns than large cap funds. Such funds are suitable for investors with relatively high risk appetite.
- Small Cap Equity Fund: An open-ended equity scheme which invests at least 65% of its total assets in small cap stocks i.e. stocks with 251st and below ranking in terms of market capitalisation. Small cap funds are suitable for investors willing to take relatively high risk for higher returns. Roughly 95% of all listed companies in India, fall in this category.
- Dividend Yield Equity Fund: An open-ended equity scheme which invests at least 65% of its total assets in equities, predominantly in dividend-yielding stocks. It is important to note that this fund invests in stocks which are capable of providing good dividends but the fund is not under any obligation to declare dividends.
- Value Equity Fund: An open ended equity scheme which follows a value investment strategy. These funds invest in three types of stocks – currently underperforming stocks or stocks with low P/E (Price to Earnings) ratio or stocks of companies belonging to emerging sectors which have the potential of rapid growth in the future.
- Contra Equity Fund: An open ended equity scheme which follows contrarian investment strategy. This fund invests against the ongoing marketing trends and bets its money on currently underperforming stocks. This fund assumes that these current underperformers will recover in the long term as and when the short-term concerns plaguing them are mitigated.
- Focused Equity Fund: An open ended equity scheme which invests a minimum of 65% of its total assets in maximum 30 stocks, mentioning the market capitalisation segments at which it intends to focus. Other equity funds typically hold 50-100 stocks. These funds thus take higher risks their holdings, than other types off equity funds but have the potential of giving good returns.
- Sectoral/Thematic Equity Fund: An open-ended scheme which invests at least 80% of its total assets in a particular sector or theme such as Banking, IT or Pharma. These funds are a risky investment option as their returns are dependent on a performance of single sector/theme but if timed correctly, can also give extremely high returns.
- ELSS: An open-ended Equity Linked Saving Scheme which invests at least 80% of its total assets in equities and equity related instruments. This fund comes with a statutory lock-in period of 3 years and is eligible for a tax deduction of up to Rs. 1,50,000 under section 80C of the Income Tax Act.
Top 5 performing Equity Mutual Funds
In the following section we have chosen 5 equity mutual funds across the major categories based on not just their returns during the previous years but also on the ability of the funds to contain losses during bearish market conditions.
- Franklin India Equity Fund: It is a multi cap fund which predominantly invests in large cap stocks and takes marginal exposure to mid/small cap stocks. The fund generated a return of 18.14% over the last 5 years, higher than both its benchmark index NIFTY 500 TRI (15.73%) and the multi cap fund category (17.58% ) for the same period. The fund is being managed by Mr. Anand Radhakrishnan since the last 11 years. (Data as on October 5, 2018; Source: Value Research)
- Reliance Small Cap Fund: This small cap fund generated returns of 15.51% and 33.26% over the last 3 and 5 years respectively. The fund’s returns are higher than both its benchmark index S&P BSE Small Cap TRI which generated returns of 6.78% and 21.14% over the last 3 and 5 years respectively as well as the whole small cap fund category which generated returns of 9.91% and 24.11% over the last 3 and 5 years respectively. (Data as on October 5, 2018; Source: Value Research)
- DSP BlackRock Opportunities Fund: It is a large and mid cap fund. The fund generated a return of 11.55% over the last 3 years, outperforming both its benchmark index NIFTY 500 TRI (11.32%) and the large and mid cap fund category (9.71%). The fund also outperformed its benchmark index for returns over the last 5 years also with returns of 17.83%. However, it was unable to beat the large and mid cap fund category which generated a return of 18.33% over the same period. (Data as on October 5, 2018; Source: Value Research)
- Axis Long Term Equity Fund: It is a diversified equity linked saving scheme (ELSS) that invests in a mix of large and select mid cap stocks. It generated returns of 21.41% over the last 5 years, higher than both the index NIFTY 200 TRI (15.21%) as well as the ELSS category (17.31%). The fund is managed by Mr. Jinesh Gopani who has been a Fund Manager of Equity at Axis Asset Management Company since April 2011. You can read our latest interview with Mr. Jinesh Gopani here. (Data as on October 5, 2018; Source: Value Research)
- Aditya Birla Sun Life Tax Relief ’96 Fund: This Equity Linked Savings Scheme (ELSS) generated returns of 11.68% and 20.89%. Over both the tenures, the fund outperformed both the NIFTY 200 index (TRI) which generated returns of 11.44% and 15.21% over the last 3 and 5 years respectively and the entire ELSS category which generated returns of 9.23% and 17.31% over the two respective tenures. The fund is managed by Mr. Ajay Garg who has over 15 years of work experience in financial services. (Data as on October 5, 2018; Source: Value Research)
If you would have considered a SIP of Rs. 1,000 for a period of 36 months starting October 2015 to September 2018 in any of the above mentioned top 5 equity funds, then the value of your investment as on September 30, 2018 would have been as under:
|Fund Name||1 Year Returns||3 Year Returns||5 Year Returns||Value of Rs. 1000 SIP for 36 months|
|Franklin India Equity Fund||0.48%||8.11%||18.14%||Rs. 39,414|
|Reliance Small Cap Fund||-1.54%||15.51%||33.26%||Rs. 42,031|
|DSP BlackRock Opportunities Fund||-3.39%||11.55%||17.83%||Rs. 40,113|
|Axis Long Term Equity Fund||2.62%||9.26%||21.41%||Rs. 41,032|
|Aditya Birla Sun Life Tax Relief ‘96 Fund||2.19%||11.68%||20.89%||Rs. 41,670|
Tax Treatment of Equity Funds
Dividends and capital gains earned on mutual funds are taxed differently. The mutual fund deducts Dividend Distribution Tax (DDT) from the dividend paid to you at 10%. With respect to capital gains tax, this is taxable in the hands of the investor. The short-term capital gains tax on equity funds is 15% and the long-term capital gains tax on equity funds is 10%. Long-term capital gains on equity mutual funds are exempt up to Rs. 1 lakh per annum. For example, if your long-term capital gains in FY 2018-19 are Rs 1.5 lakh, only Rs 50,000 will be taxable. You can find out more about this here.