Equity fund is a class of mutual fund that primarily invests in listed stock market securities. Thanks to the stellar long term returns, equity funds have become one of the most popular long term investment avenues in India in recent times. As per the data released by the Association of Mutual Funds in India (AMFI), more than Rs. 8 lakh crore has been invested in equity mutual funds until December 2018. This article will help you to get answers to all your questions related to equity funds in India.
What is an Equity Fund?
An equity mutual fund predominantly invests its assets in equities i.e. listed stock market securities. As per the SEBI Mutual Fund guidelines, an equity fund is mandatorily required to invest at least 65% of its assets in equities and equity-related instruments. It can invest the balance 0-35% in debt or money market securities. Equity funds can be managed actively or passively. While most equity schemes in India are actively managed, examples of passively managed equity schemes include Exchange Traded Funds (ETFs) and Index Funds.
How are the Equity Funds Classified?
Equity funds can be principally categorised based on the size of listed companies (market capitalization) they invest in, the geography they focus their investments in and the investment style. Some equity funds invest in securities of a specific sector such as pharma, banking, automobile, IT etc. are known as sectoral funds.
Types of Equity Funds
The Securities and Exchange Board of India (SEBI) has classified equity funds as follows:
Based on Market Capitalization
- 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 total 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 typically generate relatively lower returns than small cap and mid cap equity 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 total market capitalisation. These funds tend to provide relatively higher returns than large cap funds but are prone to higher volatility as compared to large cap equity schemes. Such funds are suitable for investors with relatively higher risk appetite.
- Large and Mid Cap Equity Fund: An open-ended equity scheme which invests at least 35% of its assets in large cap and at least another 35% of its assets in mid cap stocks. Since a large and mid cap fund invests in both large and mid cap stocks, it can provide an optimal blend of higher returns and lower volatility. While mid cap stocks can potentially provide higher returns that pure large cap mutual funds, the presence of large cap stocks in the portfolio makes the fund less volatile than pure mid cap mutual funds. Investors with the perspective of high return at moderate risk can look out for a large and mid cap equity fund.
- Small Cap Equity Fund: It is 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. Roughly 95% of all listed companies in India, fall in this category. Small cap funds are suitable for investors who are willing to embrace higher volatility and risk to earn higher returns.
- Multi-Cap Equity Fund: An open-ended equity scheme which invests at least 65% of its assets across the large cap, mid cap, and small cap stocks and other 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.
Based on Profit Distribution and Growth Prospects
- 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 stocks which are presently underperforming due to being out of favour and therefore, available at a discount. underperforming or stocks with low P/E (Price to Earnings) ratio or stocks of companies belonging to emerging sectors which have the potential of rap.
- Growth Equity Fund: The primary goal of a growth equity fund is of capital appreciation by investing the corpus in a diversified portfolio of growth-oriented stocks. These funds either do not pay or pay very little dividends. Companies with high growth potential and good corporate earnings which reinvest their profits are included in growth equity funds.
Based on Investment Strategy
- Contra Equity Fund: An open-ended equity scheme which follows a 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 the performance of single sector/theme but if timed correctly, can also give extremely high returns.
Based on Equity Fund Management Style
- Active Equity Funds: Equity funds actively managed by the fund managers are known as active equity fund. With active equity funds, managers pick stocks to invest fund corpus to secure higher returns than its benchmark. Since active funds have relatively higher churning of the portfolio than passive funds, the fund management fee is also higher.
- Passive Equity Funds: These funds track a market index or any particular market segment to determine where to invest in. Equity funds that follow a particular index as its investment strategy are known as index funds. Another example of a passive fund is ETF. ETFs are not actively managed by fund managers. Instead, an ETF may simply copy an index and endeavour to replicate its performance.
Based on Tax Treatment
1. ELSS: Equity Linked Saving Scheme (ELSS) is again an open-ended equity fund with added tax benefits. ELSS invests at least 80% sof 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. 1.5 lakh under section 80C of the Income Tax Act, 1961.
2. Non-Tax Saving Equity Funds: All equity funds other ELSS are basically non-tax saving equity funds. These funds are subject to Short Term Capital Gains Tax (STCG) or Long Term Capital Gains Tax (LTCG) based on the period of holding.
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.
- Kotak Emerging Equity Scheme: It is a mid-cap fund which predominantly invests in mid-cap stocks and takes marginal exposure to large or small cap stocks. The fund generated annualized return of 23.55% over the last 5 years, higher than both its benchmark index S&P Mid Cap TRI (17.78%) and the mid-cap fund category (19.70% ) for the same period. The fund is being managed by Mr. Pankaj Tibrewal since January 2013. (Data as on April 5, 2019; 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 18.26% over the last 5 years, higher than both its benchmark S&P BSE 200 TRI (14.29%) as well as the ELSS category (15.13%). 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 April 5, 2019; Source: Value Research)
- Aditya Birla Sun Life Tax Relief ’96 Fund: This Equity Linked Savings Scheme (ELSS) generated returns of 18.36% over the last 5 years. The fund has outperformed its benchmark S&P BSE 200 TRI which generated returns of 15.21% over the last 5 years. The fund also secured better returns then entire ELSS category which generated returns of 15.13%. The fund is managed by Mr. Ajay Garg who has over 15 years of work experience in financial services. (Data as on April 5, 2019; Source: Value Research)
- Mirae Asset Emerging Bluechip Fund: It is a large and mid cap fund with an AUM of more than Rs. 6000 crore has generated returns of 26.23% over the last five years. The fund has given much higher returns than its benchmark S&P BSE 250 Large MidCap TRI ( 14.44%). The fund has also outperformed large and mid cap category which generated returns of 17.10%. The fund is currently managed by Ankit Jain since Jan 2019. (Data as on April 5, 2019; Source: Value Research)
- SBI Small Cap Fund: It is a small cap fund managed by SBI Mutual Fund which has generated returns of 28.85% over the last five years. The fund has outperformed its benchmark S&P BSE Small Cap TRI which generated annualized returns of 16.52% over the last 5 years. The fund has also performed better than its category (20.96%). The fund is managed by R. Srinivasan since November, 2013. (Data as on April 5, 2019; Source: Value Research)
If you would have considered a SIP of Rs. 1,000 for a period of 36 months starting April 2016 to March 2019 in any of the above mentioned top 5 equity funds, then the value of your investment as on March 31, 2019 would have been as under:
|Fund Name||3 Year Returns||5 Year Returns||Value of Rs. 1000 SIP for 36 Months|
|Kotak Emerging Equity Fund||16.69%||23.55%||Rs. 40,890|
|Axis Long Term Equity Fund||14.58%||18.26%||Rs. 43,495|
|Aditya Birla Sun Life Tax Relief 96 Fund||14.78%||18.36%||Rs. 42,746|
|Mirae Asset Emerging Bluechip Fund||21.96%||26.23%||Rs. 44, 766|
|SBI Small Cap Fund||17.54%||27.30%||Rs. 42,842|
How Equity Funds are Taxed?
Dividends and capital gains earned on mutual funds are taxed differently. The mutual fund house 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.
Also Read: Tax on Mutual Fund
SIP or Lumpsum: Which One is Better?
An investor can invest in mutual funds through SIP or lumpsum. In case of lumpsum, the investor invests the entire investible amount at one go while in case of Systematic Investment Plan (SIP), the investor invests a specific sum of money at regular intervals. Investing lumpsum basically works on a strategy timing the market and can give good returns in the long term if done correctly. However, investors who prefer to mitigate risk can benefit from SIP as it helps in spreading market risk across time by averaging out the cost of purchase. Further, SIP provides flexibility and affordability of investment and helps in maintaining investment discipline.
One of the key benefits of SIP is rupee cost averaging. Since an investor invests at regular intervals through SIP, lesser units are allotted when mutual fund unit prices are high and greater number of units are allotted when prices are lower. This way, your investment keeps on averaging out the cost of mutual fund unit purchase and saves you from wild swings in the market.
Read More About Systematic Investment Plan (SIP)