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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-market instruments. They offer aggressive returns ranging from 10 to 12% ( pre-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.

What are Equity Mutual Funds?

Equity mutual funds invest the pooled corpus of money majorly in shares and stocks of different companies. In simple terms, equity mutual fund invests in shares on your behalf.

Over 65% of the portfolio of equity mutual fund comprises of investment in equity and equity-related instruments, like preference shares.

The percentage of equities in the portfolio depends on the scheme 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. Thus, equity mutual funds are volatile investments.

On the other hand, a prudent stock selection can increase the portfolio value multi-fold over a period of time. Which 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 float schemes matching long-term financial needs like retirement fund and creating a 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 & shares (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.

Types of Equity Mutual Funds in India

Multi-Cap Fund

A Multi-Cap Fund 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 be used to create a multipurpose corpus of long-term wealth in a safer way.

Large Cap Fund

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, have a long track record of robust financial performance and established operations.

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.

Mid Cap Fund

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.

Small Cap Fund

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.

Value Fund

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.

Contra Fund

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.

Thematic/ Sectoral Fund

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 being exposed to high risks of cycles changing 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.

Equity Linked Savings Scheme (ELSS)

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 end up generating higher returns.

Benefits of Equity Mutual Fund Investment

Inflation Beating Returns

Equity mutual fund investment has the potential to generate multi-fold returns in the long-run that are not possible with debt mutual funds.

However, the underlying equity instruments are subject to wide market fluctuations and economic factors that impact portfolio value.

Helps to Create Wealth in Long-term

Equity mutual funds invest in shares of companies that have the potential to create wealth over the long term.

The higher returns from equity mutual funds can help you create a significant wealth corpus which is not possible through fixed income based investments.

Helps to Achieve Long-Term Goals

The high returns and the huge wealth corpus created from equity mutual funds is best for fulfilling long-term life goals like a retirement fund and child’s education fund.

But for that to happen you need to have patience and a long investment horizon.

Professional Management & Diversification

When compared to personal equity investment, equity mutual funds investment carries the benefit of;

  • Diversification
  • Professional fund management
  • Lower investment cost
  • Dedicated fund manager

Specific Equity Mutual Fund Schemes Available

Equity mutual funds have specific schemes that can fulfill your investment needs like;

  • Tax Savings
  • Contra Investments
  • Value Investments
  • Sectoral & Thematic Investment

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 grow wealth at a rate above inflation. Hence, you would naturally be interested to know about equity mutual fund performance. When compared to other mutual fund categories, 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.

Taxation on Equity Mutual Funds

The capital gains derived on investments for a holding period of 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

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 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.

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

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 investments across diverse market capitalisations for an 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

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%. 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.

Best Equity Mutual Funds in India

#1. Invesco India Growth Opportunities Fund (G)

Invesco India Growth Opportunities Fund-Growth is benchmarked to the BSE 100 India Total Return Index. The first minimum lumpsum investment amount is Rs. 1000 or a SIP of Rs. 1000.

The investment objective of the fund is – “To provide long-term capital appreciation/ income by investing predominantly in a diversified portfolio consisting of equity and equity-related securities large-cap companies”.

Salient features of Invesco India Growth Opportunities Fund-Growth as on 25th March 2020 are as under:

Features Invesco India Growth Opportunities Fund
Managed by Invesco Asset Management Company Pvt Ltd
Asset Class type Equity, Diversified
Risk Type Moderately High Risk
The first minimum investment amount Lumpsum Investment- Rs 1000
SIP Investment- Rs 500
AUM ₹ 2498.42 Crores
Asset Allocation Equity- 96%
Others- 4%
Exit Load 1% on or before 1 year

#2. Kotak Standard Multicap Fund (G)

Kotak Standard Multicap Fund is benchmarked to the Nifty 200 Total Return Index. The investment objective of the Kotak Standard Multicap Fund is – “To generate long-term capital appreciation from a portfolio of equity and equity-related securities generally focused on a few selected sectors”.

Salient features of Kotak Standard Multicap Fund as on 13th December 2019 are as under:

Features Kotak Standard Multicap Fund
Managed by Kotak Mahindra Asset Management Company Limited
Asset Class type Equity
Risk Type Moderately High Risk
The first minimum investment amount Rs. 5000 or a SIP of Rs. 1000
AUM Rs. 28,348.01 Crores
Asset Allocation Equity – 90.27%
Others – 9.71%
Debt – 0.013%
Exit Load 1% on or before 1 year

#3. Mirae Asset Large Cap Fund (G)

Mirae Asset Large Cap Fund is benchmarked to the Nifty 100 Total Return Index. The investment objective of the Mirae Asset Large Cap Fund is – “To generate long-term capital appreciation by capitalizing on potential investment opportunities by predominantly investing in equities of large-cap companies”.

Salient features of Mirae Asset Large Cap Fund as on 13th December 2019 are as under:

Features Mirae Asset Large Cap Fund
Managed by Mirae Asset Global Investment Management (India) Private Limited
Asset Class type Equity
Risk Type High Risk
The first minimum investment amount Rs. 5000 or a SIP of Rs. 1000
AUM Rs. 15,896.69 Crores
Asset Allocation Equity – 97.84%
Others – 2.16%
Exit Load 1% on or before 1 year

#4. AXIS Bluechip Fund (G)

AXIS Bluechip Fund-Growth is benchmarked to the Nifty 50 Total Return Index. The first minimum lumpsum investment amount is Rs. 5000 or a SIP of Rs. 1000.

The investment objective of the fund is “To provide long-term capital appreciation/ income by investing predominantly in a diversified portfolio predominantly consisting of equity and equity-related securities large-cap companies including derivatives”.

Salient features of AXIS Bluechip Fund-Growth as on 25th March 2020 are as under:

Features AXIS Bluechip Fund
Managed by Axis Asset Management Company Ltd
Asset Class type Equity, Large Cap
Risk Type Moderately High Risk
The first minimum investment amount Lumpsum Investment- Rs 5000
SIP Investment- Rs 1000
AUM ₹ 11823.95 Crores
Asset Allocation Equity- 82%
Others- 18%
Exit Load 1% on or before 1 year

How to Invest in Equity Mutual Funds through Scripbox

Following is the stepwise process of investing;

Step 1 – Create a Long Term Wealth (Equity) Plan on Scripbox

Equity Mutual Funds

You need to create a “Long Term Wealth (Equity) plan for investing in equity mutual funds.

Go to the Scripbox website and select “Let’s Get started”.

Equity Mutual Funds

Choose the option “Build wealth” from the list, to invest in top equity mutual funds.

Next, you will get a predefined Scripbox “Long Term Wealth” plan with investment in best equity mutual funds. Click on “Continue” to proceed with investment in equity mutual funds.

Step 2 – Create an Online Account with Scripbox

Equity Mutual Funds

The next webpage will prompt you to signup and create an online account with Scripbox. An online account is required to invest, track, and manage your mutual fund investment.

The account can be created using email and password or by connecting with your existing Facebook or Google account.

Step 3 – Select one of the Payment Methods

Equity Mutual Funds

Once you are logged-in you will see the plan details as above. Here you need to select one of the payment methods.

Using SIP you make a fixed regular investment for a defined period. With SIP you have the flexibility to choose the amount and SIP frequency.

Using lump-sum (onetime) payment, you invest a large sum of money without the benefit of SIP.

Next, you need to provide the investment amount.

The example has taken the SIP payment method and Rs. 20,000 as the amount. You can make your selection as per your cash flows.

Click on “See Recommended Funds” to proceed with equity mutual fund investment.

Step 4 – Fund Allocation

In this step, you will get the list of funds and the fund allocation.

Scripbox gives you the flexibility to change the funds and the allocated amount as per your choice. For that, you need to select the option “I want to change funds/ amount”.

Click on “Next” to proceed with bank details and money transfer.

Step 5 – Bank details and Money Transfer

Equity Mutual Funds

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 secured and the transaction happens only when you authorize.

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.

Published on December 18, 2019