Equity Mutual Funds

Understanding Equity Mutual Funds

Equity means ownership. When an investor buys a share of a company, then s/he acquires ownership of the company based on the number of units of stocks or shares bought by him or her. Equity mutual funds invests in shares of different companies across all market capitalization. Equity funds are the riskiest asset class among mutual funds. Hence, they tend to provide higher returns than debt and hybrid funds.

Working of Equity Mutual Funds

Equity mutual funds allocate 60% of their assets in stocks of various companies in suitable proportions. Suitable here means that the assets are allocated according to the investment objective of the company. The remaining portion is invested in debt mutual funds. This serves two purposes – 1) It brings down the risk level 2) it helps to fulfill sudden redemption requests. Which companies to invest in and how much to invest in the decision that is taken by the fund manager. So, it is very important to have an experienced fund manager. 

Investing in equity mutual funds should be dependent on your risk profile, investment horizon and financial goal. Equity mutual funds are the appropriate product for long-term investing as it helps in combating market fluctuations in a longer period. 

Types of Equity Funds

Based on Market Capitalisation

Large Cap Equity Fund- Large cap companies are companies that are well established and so there is lower risk attached which tend to give stable returns. 

Mid Cap Equity Fund – This kind of funds invests in mid cap companies. They do not offer as stable returns as large cap funds. 

Small Cap Equity Fund- This type of fund invests in stocks of small cap companies. As they are not as well established as large cap, they are riskier and do not offer stable returns. 

Mid and Small-Cap Companies: These companies as the name suggests, invests in mid and small cap companies both. 

Multi-Cap Fund: Invests in stocks across market capitalization. These funds are restricted to invest a minimum of 25% in each market cap category i.e., large, mid and small cap. 

Flexi-Cap Fund: It has the freedom to invest in the proportion of the portfolio in any market cap without restriction.

Based on Sector and Themes

These funds focus on a particular sector or theme to invest in. Sector funds invest in one specific industry such as Pharma, Chemicals, FMCG or any other. While Thematic funds invest in companies which follow one theme or subject. An example of this is an infrastructure-based fund invests in cement, power, steel and other sectors. These kinds of funds tend to be riskier. 

Based on Investment Style

The above-discussed funds have an active investing style, where the fund manager decides the composition of the portfolio. These kinds of funds are called active funds. Now, there are other kind of funds which are called Index funds. Index funds have a passive style of investing. Index funds invests in equities in the same proportion as present in the index the fund follows. For example- A NIFTY index fund, will invest in the companies present in the NIFTY in the same proportion as NIFTY holds. The fund manager has to just imitate the holdings of the index the follows and hence they are low cost funds as they are passively managed.

Characteristics of Equity Mutual Funds

Cost of Funds

SEBI has capped the expense ratio for equity mutual funds to 2.5%. A lower expense ratio means higher returns for investors. 

Diversification

By investing in equity mutual funds, you get the benefit of investing in various stocks with a nominal amount. But there is a risk of concentration involved. 

Holding Period

When you redeem your fund units, you earn capital gains. These capital gains are taxable. For how long you have stayed invested matters while calculating the taxation and this is called the holding period. Equity holding for less than one year is known as short term and is taxed at 15% while long term equity holdings are for more than 1 year and are taxed at 10% if the gains exceed Rs 1 lakh.

[ Don’t forget to check: Best Short-Term Mutual Funds of 2021

Benefits of Investing in Mutual Funds are

1. Systematic investment

2. Flexibility

3. Diversification

4. Convenience 

5. Low cost

6. Liquidity 

7. Taxation on equity mutual funds

Short Term Capital Gains (STCG) are taxable at 15% while Long Term Capital Gain (LTCG) is taxable at 10% if the gains exceed Rs 1 lakh. 

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