Equity mutual funds invest in stocks of companies listed on the stock exchange. They invest across market capitalizations using multiple strategies to earn a high return. Equity funds have to invest at least 65% of their assets in equity to qualify as equity mutual funds. Hence they earn a higher return than debt or hybrid funds. The risk in these funds is higher than any other asset class as well as their performance is dependent on the market conditions. Equity mutual funds best suit investors who have medium to high-risk appetite and have an investment horizon of at least five years.
Equity mutual funds should invest at least 65% of their assets in equity. The rest can be invested in debt or held in cash to meet redemption requests. Equity mutual funds are actively and passively managed. Passively managed funds mimic the benchmark index and hence need no asset allocation strategies to decide the portfolio. Whereas, actively managed funds follow multiple approaches to earn high returns. Based on the objective and strategy, the assets can be invested in large cap, mid cap, small cap, large and mid cap, or the fund can follow a multi cap strategy. The investment style can be concentrated (focused) or value or growth-oriented.
The fund manager uses multiple strategies like the top-down approach and the bottom-up approach to analyze the stocks for the fund’s portfolio. Using these strategies, the fund manager aims to maximize the returns of the fund. Given that the fund’s performance is market-linked, the risk is equity finds is high. The fund’s risk is usually managed by allocating a small portion of assets to debt.
Equity funds in India fall under the following three categories:
Market Capitalisation refers to the total rupee value of a company’s outstanding shares of stock.
All fingers are not the same. Similarly, not all investors are the same. Not all mutual funds suit all investors, and each investor is unique. They have their investment objectives and have different requirements. Hence the mutual funds that best suit each of them shall be different. For investors looking to invest for long term (5 plus years), equity mutual funds best suit them. Long term horizon gives funds enough time to combat market fluctuations.
For an investor looking to invest in tax saving, ELSS is the best option available. For new investors just stepping into the market, large cap funds are a better call as they invest in the top 100 companies and hence are less prone to market fluctuations. For investors with very long term goals like retirement, diversified equity funds are a good call. These funds invest across market capitalizations as they have a higher return and low risk. For investors with high-risk appetite, small and mid caps help in earning high returns.
Hence, depending on the investor’s objective, horizon, and understanding of risk, the fund choices vary. But one thing stays common for all equity investors, and that is the investment horizon. All equity investors need to have a minimum of 5 years as their investment tenure. This is because equity funds are affected by market fluctuations, and they need enough time to combat these and grow. For shorter tenures, there are always debt funds that investors can turn to.
Before investing in equity mutual funds, investors have to ensure that they have examined the following.
Equity mutual funds are taxed based on the holding period of the investment. If the investment is sold before one year (in the short term), a short term capital gains tax of 15% (plus 4% cess) applies to the gains. If the investment is sold any time after one year, a long term capital gains tax of 10% (plus 4% cess) is applicable on gains above Rs 1 lakh. Effective from 1st April 2020, dividends are taxed in the hands of investors at the income tax slab rate. And dividends above INR 5,000 are subject to TDS of 10%. Equity mutual funds are subject to securities transaction tax of 0.001% if investors sell the units. Investors should take advantage of investing for longer horizons and earn higher returns and enjoy tax benefits.
Investing in equity funds provides diversification to the portfolio and also helps increase overall return. Equity funds have multiple categories of funds to choose from. Depending on the investor’s financial goals, risk profile, and horizon, they can select the fund that best suits their requirements.
An equity fund’s performance is affected by market fluctuations. Hence these are riskier than debt and hybrid funds. But within equity funds, there are multiple categories with varying risk levels. Investors can choose the funds based on their risk appetite.
Diversified equity funds follow the concept of putting their eggs in different baskets. They invest in companies across sectors, industries, and market capitalization. They do this to maximize return and minimize risk in the portfolio. It is ideal for investors who want to invest in long term goals like retirement and a child’s education.
Investing in equity funds can be done through online and offline mode. Investors can visit the AMC’s office directly and fill in the paperwork to invest in the fund through offline mode. They can also approach brokers or distributors who will file the paperwork for the investors. This is done mostly through offline mode. Investors can visit multiple online portals like Scripbox to invest in equity funds. These online portals also offer customized services. The portal provides funds that best suit investors’ objectives, risk appetite, and investment horizon.
Taxation on mutual funds is a complex topic. Taxes paid on your mutual fund investments vastly depend on factors such as what kind of funds you have invested in, the duration of your investment, which income tax slab you belong to and so on.