Equity Mutual Funds – Concept, Workings, Compatibility, Features, Types, Tax, Investment Process & more

The securities and exchange boards of India regulates the mutual funds. Equity mutual funds are quite famous for investors as it offers higher returns.

For a plethora of investors today, mutual funds are one of the most popular tools. As of now, mutual funds have undergone a lot of change.

It is quite challenging to choose mutual funds, as there are different types of mutual funds available in the market.

Before selecting any fund, you must weigh its pros and cons so you can avoid any losses and also, you must learn about the basics of mutual funds.

About Equity Mutual Funds

Ideally, equity funds invest almost all of the capital in the equity shares of different companies across the market. It is the only reason why the fund offers the maximum returns of all the funds.

As per the SEBI guidelines, the fund invests the majority of the capital amount in equity funds and invests only 10% in debts.

If you compare them to debt funds, you must know that you can surely earn more when you invest here.

But at the same time, equity funds come with risk because the market volatility affects the funds significantly. These funds are the riskiest funds of all the mutual funds.

Above all, it offers excellent returns than hybrid and debt funds. When it comes to returns on the capital investment, then it highly depends upon the performance of the company.

In simple terms, we can say that equity funds are not one size fits all funds.

As per the investment objective, there are different types of equity funds that are easily matched as per your risk-taking appetite.

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How does Equity Mutual Funds work?

Firstly you need to know that when you invest in equity funds, then at least 60% of the capital amount goes to equity shares of the different companies.

The allocation of the asset must be matching the aim of the investment.

Based on the condition of the market, you can allocate funds in stocks of large-cap, mid-cap, or small-cap companies. The investment style is either fund oriented or value-oriented.

After investing in the capital amount, the remaining amount goes to debt and money market instruments.

It is essential to control the instant redemption requests and reduce the risk to some level.

To take advantage of the changing conditions of the market and also to earn maximum returns, the fund manager then makes the buying and selling decisions.

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Should you Invest in Equity Funds?

Before you choose to invest in equity funds, you must know that they must meet your investment objectives and risk profile.

You can ideally invest in these funds if you have a long term investment objective of around five years. It will give time to the fund to deal with the ongoing market fluctuations.

For Newcomers in the Market

Large-cap equity funds are an ideal choice for investors who want to get the hang of the market.

Above all, the best part about investing here is that the fund invests in the equity shares of top-performing companies, including the blue-chip companies.

The risk level is also minimum because the companies are stable in the market for a long time now, and they can provide consistent returns.

For Market-Savvy Investors

You can surely invest in diversified equity funds if you know the working of the share markets and are open to taking risks.

The funds are truly unique because they offer high returns at low risk. As compared to equity funds, which invest only in small and mid-caps.

The equity funds work perfect for long term investors, also as the market then blends with the ongoing volatility.

Additionally, equity funds are also a great alternative option for investors who look forward to saving taxes besides earning higher returns.

The mutual fund scheme is eligible for tax exemption under section 80 C of the income tax act.

Features of Equity Mutual Funds

Here are the few characteristics of Equity Mutual Funds –

Investment Costs

Often, the regular buying and selling of equity shares tend to leave an impact on the expense ratio of equity funds.

As per SEBI, the expense ratio of equity funds is around 2.5%. The lower the expense ratio higher, the returns will be.

Holding Period

When the investors redeem the units of the mutual funds, they earn returns on the capital gains. The tax mainly depends upon the duration of the fund.

If the holding period is less than one year, then it is a short term investment. Tax applicable to short term gains is 15%.

On the other hand, if the holding period is more than one year, then it is a long term investment.

If the amount of investment is more than 1 lakh, then the tax applicable is 10% on long term investment.

Diversification and Cost-Effectiveness

When you invest in equity funds, you can get to learn more about different stocks. By investing a small amount, you can surely benefit.

But one thing you need to know that the fund will go through the risk of concentration.

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Why should you Invest in Equity Mutual Funds?

The best part about investing in equity mutual funds is that it allows you to invest in the capital market without stressing about particular stocks.

Additionally, investors don’t need to have in-depth knowledge about the market as the mutual funds expert handles everything.

Higher Returns

The equity mutual funds promise to offer higher returns as compared to other funds.

As per the historical data, we can say equity funds always provide inflation-beating returns. When the prices of securities increase, the investment value of the funds also rises.

Diversified Portfolio

Investments under equity funds are in different sectors across the market.

It is always advisable to invest in a diversified portfolio because even when the market is bearish, not all stocks will go through depreciation.

The stocks that are out performing will take up the losses.

Professional Management

The best part about investing in mutual funds is that professionals only manage the funds. These experts have a lot of knowledge about how the market works.

To meet the agenda of the scheme, the fund manager makes a crucial analysis to smoothen the decision-making process.

Low Investment Cost

Investors can invest in this scheme with a minimum amount of Rs.500 through a systematic investment plan.

Additionally, the expense ratio as per SEBI is just 2.5%, and in the future, it is most likely to dip down.

Convenience and Liquidity

The equity funds are highly liquid as both SIP and lump-sum options are available. Furthermore, investors can readily redeem units under equity funds whenever they need.

Things to consider before Investing in Equity Mutual Funds

Here are few things which any investor should consider before investing in Equity Funds –

Financial Goal

Before investing in the equity mutual fund, you must know about your financial objectives.

After understanding your goals, you can choose an equity fund that aligns with them. These funds are ideal for investors having long term investment goals.

Fund’s Performance

Ideally, you can learn about the performance of the funds by reviewing some elements, including past returns.

The historical data can help you decide if the scheme is worth investing in or not.

Risks Involved

We all know that mutual funds are subject to market risks. The stance of investment basically depends upon the risk appetite and risk involvement.

As compared to other fund types, mutual funds are quite risky.

The Lock-in Period

Before investing in any kind of mutual fund, you must take into account the lock in period. These funds are not ideal for investors who are looking for short term investment goals.

Costs Involved

Some of the expenses included in the equity mutual funds are entry load, expense ratio, and exit load.

You must consider all these costs before purchasing or redeeming the units of the mutual fund. It is also essential to compare these costs besides reviewing them.

Check out all types of Hybrid Funds here

Types of Equity Mutual Funds

Here you will find various types of Equity Mutual Funds –

Investment Based Funds

Theme and Sectoral Funds – Under this category, the investments focus on specific sectors and themes.

Sector funds tend to invest in companies hailing from particular sectors, including pharma, FMCG, etc. Thematic funds invest in companies in one specific niche, including emerging companies.

These funds are most likely to be risker as the stocks undergo both sectoral and market risks. Under market capitalization, these funds can be diversified.

Focused Equity Fund – Under this fund, the scheme is invested in 30 stocks at max at the specific period of launch.

Contra Equity Fund – These schemes tend to follow a contrarian strategy. The experts who offer this type of fund analyze them thoroughly and look for underperforming stocks and buy them.

They assume that in the long term, it will recover.

Market Capitalization based Funds

Large-Cap Funds – These funds ideally invest at least 80% of the fund amount in equity shares of large-cap companies.

As compared to mid-cap and small cap funds, these funds are relatively stable.

Mid-Cap Funds – These funds invest at least 65% of the capital amount in equity shares from mid-cap companies.

No doubt they offer better returns as compared to large-cap funds, but they are also riskier.

Multi Cap Funds – These funds invest 65% of the capital amount in the varying proportion of different shares, including large-cap, mid-cap, and small-cap companies.

To match the economic conditions and the investment plan of the scheme, the fund manager tends to readjust the fund frequently.

Based on Investment Style

Active Funds – The fund manager has an active role in the management of these funds as the experts choose the shares and investment.

Passive Funds – The fund manager doesn’t have an active role in the selection of shares.

Tax Benefits on Equity Funds

Equity funds are the only funds that are applicable for benefits up to Rs.1.5 lakh under section 80 C of the income tax act.

These schemes tend to invest at least 80% of the fund amount in equity-related tools. The scheme features a lock-in period of 3 years.

All other equity funds are non-tax saving. It means that returns are applicable for capital gains tax.

How can you invest in Equity Mutual Funds?

Offline Mode – Under this mode, you can visit the fund house in your proximity and invest in the scheme.

All you need to do is carry some mandatory requirements, including PAN card, KYC documents, canceled cheque, address proof, etc. Additionally, you can invest through a broker.

Online Mode – If you are looking for a stress free mode for investing in mutual funds, then the online mode is just for you.

You can just fill up the form below & start the process. With a click of a button, you can find different schemes online and choose a scheme.

Which is a better SIP or Lumpsum?

When it comes to investing in equity funds, then this is a big question.

Lump-sum investments are ideal for investors who have a high amount of investment. But not many investors choose to invest in a lump sum way.

On the other hand, a systematic investment plan allows you to invest in a fixed sum for a specific period. You can invest in the frequency of SIP under weekly, quarterly, and monthly.

Equity Mutual Funds – Conclusion

Hence with equity funds, you can earn a return of 10-12%. Above all, you need to choose the right scheme so you can make a healthy return on your investment.

These schemes are highly beneficial for investors as they don’t have to bear a lot of risk.

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