Equity Funds in India

What are Equity Funds?

Equity mutual funds invest the pooled corpus of money majorly in shares and stocks of different companies. In simple terms, the meaning of equity mutual fund is that it invests in shares on your behalf. Over 65% of the portfolio of equity mutual funds comprises of investments in equity and equity-related instruments, like equity and preference shares.

The percentage of equities in the portfolio depends on the scheme’s objectives. The rest of the portfolio money is invested in debt and money market instruments in order to meet redemption requirements. The net asset value of equity mutual funds fluctuates with every market movement. This means equity mutual funds are volatile investments.

On the other hand, prudent stock selection can increase the portfolio value multifold over time. This makes equity mutual funds a high-return investment that has the potential to generate long-term wealth.

How Equity Mutual Funds Work?

Equity mutual funds are schemes suitable for long-term financial needs like retirement funds and creating wealth corpus. Equity schemes invite investment from investors who have the capacity to take market risk. The pooled corpus of an equity fund is created from the contribution received from the equity fund investors. The pooled fund is managed by the asset management company (AMC). The AMC appoints a fund manager, analyst, and a team of finance professionals for investing, tracking, and management.

The pooled fund is then utilized to invest in stock (i.e. equities) and equity-related instruments of different companies. The investment is made after detailed market research and analysis. Equity mutual fund investors are allotted mutual fund units to denote their investments. The equity portfolio value changes with the movement in the prices of the underlying equity shares/ instruments. The portfolio value in terms of each unit of the mutual fund is also known as the net asset value (NAV). NAV for mutual funds is calculated daily at the end of the day.

An increase in the underlying stock prices raises the portfolio value, and vice-versa a decrease in price leads to lower portfolio value.

Different Types of Equity Funds

Equity Funds are mainly divided into 3 classes

• Based on Market Capitalization
• Based on Investment Style
• Based on Tax Benefits

Market Capitalization

Large Cap Equity Funds

Large-cap mutual funds are open-ended equity schemes. A minimum of 80% of the value of the portfolio of large-cap mutual funds consists of equity & equity related instruments of large-cap companies.

When you invest in a large-cap mutual fund, a steady wealth creation opportunity.

Large-cap mutual funds have the lowest risk among equity mutual funds because the large-cap companies have stable businesses. They have seen different business cycles, and have a long track record of robust financial performance and established operations.

Explore: Best Large Cap Funds

Mid Cap Equity Funds

A minimum of 65% of the total corpus of the mid-cap mutual fund schemes is invested in shares of mid-cap companies.

The mid-cap companies have expansion plans and are in a growing phase. Thus, mid-cap mutual funds are riskier than large-cap mutual funds.

Explore: Best Mid Cap Fund

Large & Mid Cap Fund

Large & mid-cap mutual funds have a minimum 35% investment in stocks of large-cap and mid-cap companies each. The fund relies on the stability offered by the large-cap stocks and earns returns from the mid-cap stocks.

You reap the benefit of investing in both large-cap and mid-cap companies simultaneously by investing in Large & Midcap mutual fund.

Small Cap Equity Funds

Small-cap companies have the highest risk of failure, as they are relatively new entities with business models still being tested by the markets they operate in.

However, they also have new products that have the potential to generate huge returns in the long-term. Small-cap companies are future companies with significant growth potential.

A small-cap fund invests a major portion (more than 65% of the total assets) in small-cap stocks. Thus, small-cap mutual funds have the highest risk but also have the potential to generate the highest returns.

Explore: Best Small Cap Mutual Funds

Multi-Cap Equity Funds

A Multi Cap Funds is a type of equity mutual fund that invests in shares of large-cap, mid-cap, and small-cap companies. The fund allocates a minimum of 65% of the total corpus in equity & equity-related instruments.

A multi-cap fund is an open-ended equity scheme, which means that the fund has no fixed maturity period. The scheme is always available for subscription and redemption.

When you invest in a multi-cap fund you benefit from the stability offered by the large-cap stocks. You also benefit from the growth opportunities of mid-cap and small-cap stocks. Overall, you have a stable portfolio with considerable inflation beating returns.

Multi-cap funds can have a lower risk as compared to individual mid or small-cap focused funds because they are the most diversified equity funds.

Thus, multi-cap funds can help create a multipurpose corpus of long-term wealth in a safer way.

Explore: Best Multi-Cap Funds

Flexi-Cap Equity Funds

A Flexi Cap Funds is a type of equity mutual fund that invests in shares of large-cap, mid-cap, and small-cap companies. The fund allocates at least 65% investments in equity & equity related instruments.

A flexi-cap fund is an open-ended equity scheme, which means that the fund has no fixed maturity period. The scheme is always available for subscription and redemption.

The unique feature of flexi-cap funds is that the fund manager has the flexibility to invest in equity across market capitalisations without any specific limitations, unlike large-cap, mid-cap, small-cap funds and multi cap. 

Explore: Best Flexi-Cap Funds

Investment Strategy

Value Equity Funds

Value funds follow a value investment strategy that relies on long-term wealth creation by investing in stocks of companies that meet the value investing criterion.

The value fund is an open-ended equity mutual fund that invests 65% of the total assets in equity and equity-related instruments.

Explore: Best Value Funds in India

Contra Equity Funds

The contra fund capitalizes on the changing market conditions. The Contra fund follows a contrarian investment strategy that involves buying and selling in contra (opposite) to the present market sentiments.

The contra fund invests a minimum of 65% of total assets in equity & equity related instruments.

Explore: Best Contra Funds in India

Thematic/ Sectoral Equity Funds

Thematic funds follow a particular theme across different sectors, like export & services fund, India opportunity, and India consumption fund. Whereas, the sectoral fund invests in a particular sector like technology, pharma, or banking.

The sector and thematic funds are risky as there are chances of cycle changes or themes dying down. Hence, they are a high risk and high return investment.

Both thematic and sectoral funds invest a minimum of 80% of total assets in equities & equity related instruments of a particular theme or sector respectively.

Explore: Best Sectoral Funds

Focused Mutual Funds

Focused equity funds invest in a limited number of stocks, and there are no restrictions on where they can invest. In other words, they can invest across large, medium, and small-cap stocks without restriction.

Focused funds invest in a maximum of 30 stocks, with at least 65% in equity & equity related instruments.

Explore: Best Focused Funds

Dividend Yield Mutual Funds

The primary focus of dividend yield mutual funds is not capital appreciation. They aim to identify and invest in stocks that offer regular dividends to the investors.

Dividend-yield mutual funds predominantly invest 65% of their assets in dividend-yielding stocks.

Explore: Dividend Yield Mutual Funds

Tax Treatment 

Equity Linked Savings Scheme (ELSS) Funds

ELSS or equity-linked saving scheme is also known as “Tax saving” equity mutual funds. The fund invests a minimum of 80% of total assets in equity & equity related instruments in accordance with Equity Linked Saving Scheme, 2005 notified by the Ministry of Finance.

Investors can save up to Rs. 1.5 Lakhs on taxes under the Income Tax Act, 1961 by investing in ELSS. Tax saving mutual funds have a three-year statutory lock-in period that helps in the reinvestment of returns and ultimately ends up generating higher returns.

Explore: Best ELSS Funds

Advantages of Investing in Equity Mutual Funds

1. 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 you factor in inflation.
2. Portfolio Diversification: When you park your money in equity mutual funds, you get exposure to 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.
3. 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.
4. Professionally Managed Funds: Majority of equity 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.
5. Convenience and Ease of Investment: The key benefit of investing in 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 equity mutual funds offers a great degree of convenience and ease of investment.
6. 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.

Taxation on Equity Mutual Funds

Equity mutual fund taxation depends on the investment holding period. 

The capital gains derived from equity fund investments for a holding period of up to a year are short-term capital gains, which are taxable at 15%. Subsequently, capital gains corresponding to a holding period greater than a year are long-term capital gains. Long-term capital gains over the sum of Rs. 1 lakh are taxable 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 best suit investors with long term horizons..

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:

1. Fund Objectives: 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 may increase in the future, 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 appears to be somewhat expensive.
2. 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 investments across diverse market capitalisations for an optimally diversified portfolio.
3. High Volatility: Even the best equity funds are exposed to market risks and can be affected by 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.
4. Cost Analysis: 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 investment. Thus, a smaller expense ratio indicates a greater profit.
   As per SEBI’s directive, the upper limit on expense ratio is 2.5%. Also, actively-managed equity funds possess a higher expense ratio than index funds.
5. 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 averages out only after a minimum period of about five years. Hence, keeping a long-term investment horizon is best when investing in equity mutual funds.
6. Financial End-Goal: A number of market experts advise investing in the best equity mutual funds for SIP or lump-sum investment if you want to meet your long-term financial goals, be it wealth-creation or retirement planning. Given its return profile, you can generate significant wealth by investing in the best equity mutual funds. With the returns offered by equity funds, you will reach financial stability, which will allow you to retire confidently and pursue your passion.

How to Invest in Equity Mutual Funds?

You can invest in equity funds through the online or offline route. The investment process is as follows:

Offline:

Opt for a broker or distributor or submit an application form for the desired scheme to the mutual fund house.

Online:

Visit the AMC’s website or platforms like Scripbox.

Step 1 – Create an Online Account with Scripbox

Step2 – Select one of the Payment Methods

Step 3 – Fund Allocation

Step 4 – Bank details and Money Transfer

Finally, you need to provide your bank account details like account number, type, and the IFSC code to identify and link your bank for mutual fund investment. The specified bank account will be used only for investing and crediting the redemption proceeds. At Scripbox, your bank account details are secure and the transaction happens only when you authorize.

Equity Vs Mutual Fund: Key Differences

The primary difference between Equity and Mutual Funds is ownership. 

Equity involves owning shares in individual companies, bearing the risk and potential reward of their performance. Mutual funds, on the other hand, pool investments from multiple individuals to create diversified portfolios managed by professionals. 

Equities offer direct ownership, requiring active management by investors, while mutual funds provide diversification and professional management, reducing risk. 

Equity investments are subject to individual stock fluctuations, while mutual funds spread risk across various assets. 

Conclusion

Equity funds are the only mutual funds that have the potential to generate multi-fold returns helpful in building a big enough wealth corpus in the long-term. You have various equity funds for all your long-term financial life goals like retirement and creating a multi-crore, multi-purpose corpus.

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 higher and make it risk worthy. Besides, if you invest in the best equity mutual funds, the risks are relatively better managed, when compared to direct investment in stocks and shares. If you have long-term gains and goals in mind, put your money in equity mutual funds.

Frequently Asked Questions

Explore other equity related funds:

• Equity Savings Fund
• Focused Equity Fund
• Private Equity Fund
• Debt Vs Equity Fund
• Best Equity Mutual Fund

Explore Equity Funds by AMC