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Your awesome guide to Equity Mutual Funds

Equity mutual funds are a class of mutual funds that invest at least 65% of your capital in stocks and shares while the remaining 35% may be invested in debt or money-making instruments. They offer aggressive returns ranging from 10 to 12% (without tax) to compensate for the risk involved, which in some instances can even beat market growth and inflation. However, it is advisable to keep your money invested in the long term to enjoy the full benefits offered by equity mutual funds.

equity mutual funds

It's nearing the end of the financial year. Rakesh and Suresh are two business partners who are deciding what to do with their profits.

"How about we put this money in a fixed deposit?" Suresh asks.

"Actually, I believe that we should invest in Equity Mutual Funds," says Rakesh.

"But isn't that risky?" asks Suresh.

"It does carry a certain amount of risk, but think of the high returns. Besides, we don't need this money for a long duration, so we can let this money sit for about 5-7 years and the gains will be phenomenal! Not to mention, that if we invest in ELSS Equity funds, we could even save on taxes," explains Rakesh.

Suresh still has his doubts so he asks Rakesh to elaborate further on equity funds. If, like Suresh, you are also interested in knowing more about equity-based mutual funds, then you have come to the right place!

Allow us to break it down for you.

What is Equity Mutual Fund?

Equity-based Mutual Funds are a class of mutual funds that primarily invests its corpus in the equity shares of a company bearing diverse market capitalization. However, the investing style must be value or growth-oriented and should be in accordance with the investment mandate.

What is Equity Mutual Fund

This means, that ‘Large-Cap’ equity schemes will invest in Large Cap companies and so on. As per Securities and Exchange Board of India (SEBI), an equity mutual fund must invest at least 65% of its asset in stocks of various large, mid, and small-cap companies.

While equity mutual funds offer a higher rate of interest, even the best equity mutual funds are prone to market risk. From the bulk of the investment in equities, the remaining 35% of the assets are invested in debt securities and money market instruments (such as Banker’s Acceptance, Treasury Bills, Certificate of Deposits, and more). This investment is to ensure liquidity to meet withdrawal requests and to buffer the risk. Equity funds could be actively or passively managed.

Attractive Features of Equity Funds

Here are some key features of equity fund investments:

Investment Cost

Since equity mutual funds are bought and sold frequently, these transactions affect the expense ratio. Expense ratio is a percentage of the investment that is involved in the maintenance of the fund. To ensure that equity funds remain as an attractive investment option, SEBI has restricted the expense ratio to 2.5% in case of equity funds, and this figure is expected to reduce further. A lower expense ratio points towards higher returns.

Holding Period

The profit made by redeeming equity-oriented mutual funds is called capital gains. These capital gains are taxable in nature. The rate of taxation on this capital gain depends on the period for which the capital stays invested in equity funds, which is the holding period.

equity based mutual funds

Cost-efficiency and Diversification

Equity funds offer exposure to a variety of stocks at nominal rates. Investing your money in the same stock or company could make you susceptible to concentration risk. However, as equity mutual funds spread out your investment across various stocks and partial debt, they minimize this risk. Hence, they bring about diversification in your portfolio without leaving a dent in your wallet.

Types of Equity Funds

Equity funds can be categorised on the basis of the investment mandate and the nature of stocks or sectors where the capital is invested. A broad classification of equity mutual funds is as follows:

Sectoral or Thematic Equity Funds

Equity funds that invest in a particular sector or theme come under this category of funds. As they are focused on a particular theme or sector, they may be riskier than the rest. This is due to the fact that these equity funds are not only affected by the market fluctuations but are also vulnerable to sectoral or thematic risk.

Sector equity funds involve specific industries such as Pharma, FMCG or Technology. On the other hand, thematic equity funds invest in specific subjects like international stocks or emerging customer companies. Thus, it may be seen that thematic equity funds have scope for diversification.

Another example of sectoral or thematic equity funds is the contra fund. It exploits the fact that a particular stock is depressed or underperforming at some point and the manager purchases it with the estimation that the stock shall pick up.

Market Capitalization Based Equity Funds

If you are investing in equity funds based on an investment mandate, you are investing in equity mutual funds that are based on market capitalization. Such funds include:

  • Large-Cap Equity Fund: 80% of the capital is invested in stocks of well-established large-cap companies, which make it a reliable and stable investment
  • Mid-Cap Equity Mutual Fund: These equity funds invest in medium-sized companies.
  • Mid and Small-Cap Equity Fund: They invest funds in both mid-cap and small-cap funds.
  • Small-Cap Equity Fund: Small-cap equity funds invest in smaller companies and, as such, are more susceptible to risk and volatility
  • Multi-Cap Equity Fund: These equity funds invest in large-cap, mid-cap, and small-cap stocks.

If you are unsure what the term “cap” has to do with mutual funds, don’t worry. Here’s a simple guide to understanding the whole thing you should know what are large caps, mid-caps, and small caps?

Equity Funds Based on Management Style

As mentioned earlier, equity mutual funds can be controlled actively or passively. In the former, the fund manager is responsible for choosing and maintaining the portfolio composition. Certain portfolios follow a specific index and the equity funds that follow this index are called index funds. They are passively managed and invest the capital in fixed proportions to each company.

Equity Mutual Funds Returns

The primary purpose of investing your money in equity mutual funds is to watch it grow. Hence, you would naturally be interested to know about equity mutual fund performance. When compared to other mutual fund categories, the equity fund returns are considerably high.
When considering the before-tax returns, equity funds offer a potential return of 10 to 12 per cent as of 2019. However, this number is subject to market conditions and the economic environment.
Invest in the best equity fund.

Taxation on Equity Funds

The capital gains derived on investments for a holding period up to a year are called short-term capital gains, which are taxed at 15%.Subsequently, capital gains corresponding to a holding period greater than a year are called long-term capital gains. Long-term capital gains over the sum of Rs. 1 lakh are taxed at the rate of 10% without any indexation benefit.

Who Should Invest in Equity Mutual Funds in India?

Since equity-based mutual funds carry a significant amount of risk, it is ideal for those having an understanding of the risk associated with equity investments and this asset class. Investors who require high liquidity and regular income from investments should rather go for debt instruments.

Normally, equity mutual funds are best suited for longer time horizons and thus lend themselves to big goals that are in the distant future and at least 10 years away.

Advantages of Investing in Equity Mutual Funds

Following are the key advantages of investing in equity mutual funds:

Inflation Beating Returns

Historical data suggests that equity mutual funds have stayed ahead of inflation at the very least.. This means that despite the increase in inflation and market growth, your returns will offset these factors.

On the other hand, conservative investment options like recurring and fixed deposits offer a rate of return that has almost negligible value when inflation is factored in.

Portfolio Diversification

Investing in Equity Mutual Funds

When you park your money in equity mutual funds, your investment is spread across various companies. Holding stocks and shares of various companies based on the sector, theme, or mandate, brings diversity to your portfolio. Further, losses in one portion get offset by gains in the other.

Sharp Capital Appreciation

When compared to other investment options, equity mutual funds offer sharp capital appreciation. This ability not only makes it an attractive investment avenue for long durations but also compensates for market growth and inflation.

Professionally Managed Funds

Majority of equity-based mutual funds are managed by professional fund managers in collaboration with market experts. Fund managers monitor the market at all times and make changes to the portfolio depending on trends. This mitigates risk and simplifies investment for you. Thus, even newbies and novices can invest in equity schemes without having to gain extensive knowledge on the subject.

Convenience and Ease of Investment

The key benefit of investing in the equity-based mutual funds is that the investor does not have to choose the stock or sector in which they wish to invest. Thus, it saves all the research and knowledge that needs to be expended. Further, you no longer have to worry about studying the market trends or projecting the future performance of the industry. Hence, investing in equities offers a great degree of convenience and ease of investment.

High Degree of Liquidity

Although equity-based mutual funds are not as liquid as liquid funds or saving bank accounts, about 35% of the investment lies in debt funds, which offer a liquid component. Hence, equity funds offer a moderate amount of liquidity.

Factors to Consider While Investing in Equity Funds

Before you get ready to put your money in equity schemes, here are a few factors that you need to consider:

Fund Objectives

top performing equity mutual funds

The best equity mutual funds help investors in realizing their wealth accumulation goals with the help of a robust investment strategy. You can focus on investment styles such as value investing or growth investing to pick your stocks.

Value investing involves putting your money in undervalued stocks whose prices are expected to increase, thereby, translating to a profit. Growth investing focuses on investing in companies displaying above-average growth even if the price of the stocks or shares appear to be somewhat expensive.

Fund Types

Equity mutual funds are purely divided into large-cap, mid-cap, and small-cap funds. Small-cap and mid-cap investments have a higher risk profile but they also offer potentially higher returns. Large-cap investments may not offer stellar returns, but they significantly cut down the investment risks. Equity funds are also available in multi-cap funds, which put your investment in across a diverse capitalization market for optimally diversified portfolio.

High Volatility

Even the best equity funds are exposed to market risks and can be affected by the shifts in the benchmark like NIFTY or SENSEX. Any rise or fall of these indexes will reflect in the value of the equity fund. Thus, it possesses a higher degree of volatility when compared to debt or money market funds.

Cost Analysis

equity mutual funds returns

Since an investor’s equity portfolio is managed by fund managers, there is a fee involved for the fund management. This fee is known as expense ratio, which is a percentage of the capital gains. Thus, a smaller expense ratio indicates a greater profit.

As per SEBI’s directive, the upper limit on expense ratio is 1.05%. It must also be mentioned here that actively-managed equity funds possess a higher expense ratio when compared to index funds.

Investment Horizon

As mentioned earlier, equity investments are not ideal for those looking for short-term investments. In the short-run, equity schemes are susceptible to a great degree of fluctuation, which average out only after a minimum period of about five years. Hence, keeping a long-term investment horizon is advised for equity-based mutual funds.

Financial End-Goal

A number of market experts advise investing in the best equity mutual funds for SIP or lump-sum investment if you are looking to meet your long-term financial goals, be it wealth-creation or retirement planning. Given its return profile, you can generate a significant wealth by investing in the best equity mutual funds. With the returns offered by equity funds, you will reach financial stability, which allows you to retire confidently and pursue your passion.

Top Performing Equity Mutual Funds

Here is a list of the best equity funds that may consider investing in:

Parag Parikh Long Term Equity Fund (G)

Previously known as Parag Parikh Long Term Value Fund, this open-ended multi-cap equity fund was launched on 28th May 2013. The equity scheme charges an exit load of 2% for redemption within 365 days and 1% exit load for redemption between 366 to 730 days.

Here’s an overview of the Parag Parikh Long Term Equity Fund (Growth):

Fund HousePPFAS Mutual Fund
Risk GradeLow
Return GradeAbove Average
Minimum Investment (in INR)1,000
Minimum SIP Investment (in INR)1,000
Minimum Withdrawal (in INR)1,000
Minimum Balance (in INR)1

Let’s take a look at the fund performance for one-time investment:

Period Invested forAbsolute Returns (%)Annualized Returns (%)Category Average (%)
1 week1.24-1.82
6 months4.46-2.62
1 year15.3915.3912.68
3 years42.9312.618.59
5 years82.5612.799.71
Since Inception172.6316.858.05

Let’s take a look at the performance for equity mutual fund for SIP investments:

Period Invested forAbsolute Returns (%)Annualized Returns (%)
1 year8.3915.83
2 year10.239.65
3 year18.5811.37
5 year35.6612.14

Motilal Oswal Long Term Equity Fund (G)

Launched on 21st January 2015, Motilal Oswal Long Term Equity Fund (erstwhile known as Motilal Oswal MOSt Focused Long Term Fund) is a tax-saving ELSS equity fund. The scheme charges no exit load, which makes it an attractive equity fund investment.

Here’s an overview of the Motilal Oswal Long Term Equity Fund (Growth):

Fund HouseMotilal Oswal Mutual Fund
Risk GradeBelow Average
Return GradeAbove Average
Minimum Investment (in INR)500
Minimum SIP Investment (in INR)500
Minimum Withdrawal (in INR)500
Minimum Balance (in INR)-

Let’s take a look at the fund performance for one-time investment:

Period Invested forAbsolute Returns (%)Annualized Returns (%)Category Average (%)
1 week1.29-1.81
6 months9.08-0.97
1 year17.6720.6810.91
3 years37.0111.167.90
Since Inception84.9513.829.93

Let’s take a look at the performance for equity mutual fund for SIP investments:

Period Invested forAbsolute Returns (%)Annualized Returns (%)
1 year11.7722.43
2 year8.097.66
3 year13.918.63

Mirae Asset India Large Cap (Equity) Fund

Erstwhile known as Mirae Asset India Equity Fund, this Equity Scheme invests in large-cap companies. Launched on 4th April 2008, the fund follows a NIFTY 100 TRI benchmark. It charges an exit load of 1% when redeemed within a period of 365 days.

Here’s an overview of the Mirae Asset India Equity Fund:

Fund HouseMirae Asset Mutual Fund
Risk GradeLow
Return GradeHigh
Minimum Investment (in INR)5,000
Minimum SIP Investment (in INR)-
Minimum Withdrawal (in INR)-
Minimum Balance (in INR)-

Let’s take a look at the fund performance for one-time investment:

Period Invested forAbsolute Returns (%)Annualized Returns (%)Category Average (%)
1 week2.37-1.97
6 months2.60-3.09
1 year16.0016.0016.12
3 years41.1912.169.16
5 years77.8812.208.69
10 years325.4715.5711.09
Since Inception428.1815.4612.77

Let’s take a look at the performance for equity mutual fund for SIP investments:

Period Invested forAbsolute Returns (%)Annualized Returns (%)
1 year7.0013.18
2 year9.018.52
3 year16.7910.34
5 year35.4412.08
10 year122.9615.31

How to Invest in Equity Mutual Funds

You can invest in equity mutual funds in the following manner:

  1. Purchase equity mutual funds through an Asset Management Company
  2. Invest in equity-based mutual funds using an online investment platform
  3. Make use of a Demat Account to invest in equity-oriented mutual funds
  4. Purchase equity schemes through Karvy and CAMS
  5. Equity funds through an agent

Final Thoughts

If you are looking for a way to maximize your wealth while saving on your taxes, you should park your money in equity mutual funds. However, do bear in mind that these investments require a longer horizon and you should have at least 5 and preferably 10 years or more to get the most out of your equity investments.

It does bear its own share of risk but the corresponding returns are extraordinarily high and make it risk worthy. Besides, if you invest in the best equity mutual funds, the risks are rather minimized, when compared to direct investment in stocks and shares. If you have long-term gains and goals in mind, put your money equity mutual funds.

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