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 categories 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 is 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.
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Classification 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 Benefit
- 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
Related Article: Best 5 Equity Mutual Funds for investment in 2020
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Advantages of investing in Equity Funds
There are certain benefits tagged along the investments made into equity schemes, for the investors willing to place their resources into these funds-
- 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
- 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
- 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 in 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
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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
To 5 Best Equity Mutual Funds to Invest in 2020
Given below is a list of 5 best equity mutual funds:
|Fund Name||3-Year Returns||Link|
|Mirae Asset Emerging Bluechip Fund||16.09%||Invest Now|
|SBI Small Cap Fund||14.62%||Invest Now|
|Invesco India Financial Services Fund||20.26%||Invest Now|
|Axis Focused 25 Fund||18.81%||Invest Now|
|Tata Retirement Savings Fund||16.60%||Invest Now|
*Data as on 24th January 2020; Source: Value Research
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How to Invest in Equity Mutual Funds?
There are different methods through which one can invest in large cap stocks:
- Offline mode– Visiting the nearest branch office of the fund house and investing in the desired scheme. You must carry all the required documents such as Identity Proof, Address Proof, Cancelled Cheque, Passport size photos, PAN Card and KYC Documents handy. You can also invest offline through a broker. However, this would then be a regular fund and not a direct fund. Think of it like a charge brokerage which gets deducted from the total investment amount
- Online Portal– If you want a hassle free mode of investing with no commissions and brokerage, you can choose websites like Paisabazaar.com which allow the investors to compare more than 1,700 funds at one platform instead of visiting the website of each AMC and then searching for numerous funds. You can select the fund in which you want to invest, look at the details and compare similar schemes as well as use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment
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