Equity Funds

Right since its inception, Mutual Funds have evolved into a preferred investment tool for many investors. However, choosing the right Mutual Fund scheme can be a difficult task due to the wide array of options available. Investment requires a careful and well-thought-out approach to avoid potential losses. Hence, it is imperative to understand the basics of the different types of schemes available to you. Here, we will explore Equity Mutual Funds and talk about the different types of equity funds along with their benefits and a lot more.

List of Equity Funds

• Quant Small Cap Fund Direct Plan Growth
• Nippon India Small Cap Fund Direct Growth
• ICICI Prudential Commodities Fund Direct Growth
• Axis Small Cap Fund Direct Growth
• Parag Parikh Flexi Cap Fund Direct Growth
• Tata Digital India Fund Direct Growth
• SBI Small Cap Fund Direct Growth
• HDFC Small Cap Fund Direct Growth
• ICICI Prudential Bluechip Fund Direct Growth
• Tata Small Cap Fund Direct Growth

What are Equity Mutual Funds?

As the name suggests, Equity Funds invest in the shares of different companies. The fund manager tries to offer great returns by spreading his investment across companies from different sectors or with varying market capitalizations. Typically, these funds are known to generate better returns than term deposits or debt-based funds. There is an amount of risk associated with these funds since their performance depends on various market conditions.

Features of an Equity Mutual Fund

An equity mutual fund will typically carry the below-mentioned characteristics:

1. Returns: Equity mutual funds are among the most high-return funds from the mutual fund spectrum. Since these funds are concentrated on equities, they come with the highest return rates. 

2. Tax Benefits: You can gain tax benefits with the investments in these funds.

3. Risk: The risk factor of equity funds is high. Since the majority of this fund is invested in equities, it is highly associated with market fluctuations. 

4. Expense Ratio: These funds also tend to have a higher expense ratio than their counterparts, given the requirement of constant management.

5. Long-Term Investments: These funds are suitable for long-term investors, given that they perform well in the long term. 

Types of Equity Mutual Funds 

There are various ways of categorizing equity funds. Here is a look at the different categorizations:

Investment Strategy-based Categorization

• Thematic or Sectoral Funds – An Equity Fund might decide to follow a specific investment theme like an international stock theme or emerging market theme, etc. Also, some schemes might invest in a particular sector of the market like BFSI, IT, Pharmaceutical, etc. Here, it is important to note that sector or theme-based funds carry a higher risk since they focus on a specific sector or theme.
• Focused Equity Fund – This fund invests in a maximum of 30 stocks of companies having market capitalization as specified at the time of the launch of the scheme.
• Contra Equity Fund – As the name suggests, these schemes follow a contrarian strategy of investing. These schemes analyze the market to find under-performing stocks and purchase them at low prices under the assumption that these stocks will recover in the long term.

Market Capitalization-based Categorization

Some schemes might decide to invest in companies with specific market capitalizations only. Here are the common types:

• Large-Cap Funds – which typically invest a minimum of 80% of their total assets in equity shares of large-cap companies (the top 100). These schemes are considered to be more stable than the mid-cap or small-cap focused funds. 
• Mid-Cap Funds – which usually invest around 65% of their total assets in equity shares of mid-cap companies (101-250th placed companies according to market capitalization). These schemes tend to offer better returns than the large-cap schemes but are also more volatile than them.
• Small-Cap Funds – which typically invest around 65% of their total assets in equity shares of small-cap companies (251st and below placed companies according to market capitalization). This is a huge list and more than 95% of all companies in India fall into this category. These schemes tend to offer great returns than the large-cap and mid-cap schemes but are also highly volatile.
• Multi-Cap Funds – which usually invest around 65% of their total assets in equity shares of large-cap, mid-cap and small-cap companies in varying proportions. In these schemes, the fund manager keeps rebalancing the portfolio to match the market and economic conditions as well as the investment objective of the scheme.
• Large and Mid-Cap Funds – which usually invest around 35% of their total assets in equity shares of mid-cap companies and 35% in large-cap companies. These schemes offer a great blend of lower volatility and better returns.

Tax Treatment- Based Categorization

• Equity Linked Savings Scheme (ELSS) – ELSS is the only equity scheme which offers tax benefits of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. These schemes invest a minimum of 80% of its total assets in equity and equity related instruments. Further, these schemes have a lock-in period of 3 years.
• Non-Tax Saving Equity Funds – Except ELSS, all other Equity Funds are non-tax saving schemes. This means that the returns are subject to capital gains tax.

Investment Style-based Categorization

• Active Funds – These schemes are actively managed by the fund managers who handpick the stocks that they want to invest in.
• Passive Funds – These schemes usually track a market index or segment which determines the list of stock that the scheme will invest in. In these schemes, the fund manager has no active role in the selection of the stocks.

How Does an Equity Mutual Fund Work

A Mutual Fund scheme is classified as an Equity Mutual Fund if it invests more than 60% of its total assets in the equity shares of different companies. The balance amount can be invested in money market instruments or debt securities as per the investment objective of the scheme.

Further, the fund manager can choose to invest in a growth-oriented or value-oriented manner and select companies according to his assessment of the investment generating maximum returns.

How Should You Invest in an Equity Mutual Fund

Like any other investment decision, you must assess your financial goals, risk tolerance, and investment horizon carefully before signing the dotted line. For understanding, we have divided the investors into two broad categories – the new entrants and seasoned investors. 

First Time Investors

Many new investors are wary of investing in the capital market since they need more capital to invest, or need more time to constantly monitor their investments (a must for share investments), or need more expertise to choose the right shares. Hence, they turn to equity mutual funds. However, there are many types of equity funds available and selecting the right one can still be a challenge.Hence, it is better to select funds after considering your investment horizon, risk tolerance and market conditions while investing in these funds.

Seasoned Investor

As a seasoned investor, you might already have an idea about how these funds perform. However, make sure to use your expertise well before investing to avoid risks. Your understanding of the market can help you choose the right scheme and earn higher returns as compared to other funds.

Invest in Equity Mutual Funds on Groww

If you are sure about getting started and ready to invest in equity mutual funds, you can also invest in them through Groww by simply following the steps below:

Step 1: Download the Groww app from Play Store/App Store.

Step 2: Open an account and complete the KYC process.

Step 3: Click on the Mutual Funds tab, browse and choose the fund you want to invest in.

Step 4: Invest in the selected fund either in a lump sum or through an SIP.

Why Should You Invest in an Equity Mutual Fund?

Equity funds, unlike other low-risk funds, give you a greater return percentage. It comes with a high potential for your wealth creation journey and to diversify your portfolio.

These mutual funds can also help you in several other ways, such as being an investment for hedging against inflation, beating economic growth, outperforming fixed-return investment plans, and much more. 

Taxation Rules of Equity Mutual Funds

Tax on equity mutual funds is levied here as follows-

Capital Gains Tax

• If you hold the units of the scheme for a period of up to one year, then the capital gains earned by you are called short-term capital gains or STCG. STCG is taxed at 15%.
• If you hold the units of the scheme for more than one year, then the capital gains earned by you are called long-term capital gains or LTCG. LTCG above Rs.1 lakh is taxed at 10% without indexation benefits.

Dividend Distribution Tax (DDT)

• This tax is deducted at source. Hence, when the mutual fund pays out dividends, it deducts DDT of 10% before distributing the dividend.

FAQs

Q1. What is an equity mutual fund?

An equity fund is a mutual fund scheme that invests more than 60% of the scheme’s assets in equity stocks. Although a minimal amount is invested in debt and other funds, it is highly concentrated on equities, therefore the name equity mutual funds. 

Q2. Are equity mutual funds risky?

Equity funds are one of the most risky funds in the mutual fund environment. They come with a high risk-return ratio. 

Q3. Who are equity mutual funds most suitable for?

These funds can be suitable for:

• Investors with a high-risk appetite

• Experienced investors

• Investors who are looking forward to diversification

• Investors who want to stay invested in the fund for the long term.

Q4. Can I invest in equity mutual funds with a low-risk appetite?

These funds majorly invest in equities, which means they carry a high amount of risk. Only invest in these funds when you have the risk appetite to do so. 

Q5. What is the investment horizon of an equity mutual fund?

Mutual funds are known to perform well in the long term. Therefore, to see positive outcomes, you need to stay invested in these funds for a period of 3 to 7 years. 

Disclaimer - Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.