What are Best Equity Mutual Funds?
An equity fund is a mutual fund that predominantly invests in equity stocks. In India, SEBI defines equity funds as a scheme that invests a minimum of 65% of its assets in equity and equity-related instruments. Equity mutual funds are risky than debt and hybrid funds. But they deliver a higher return than debt and hybrid funds. The funds are affected by market fluctuations.
Best equity mutual funds can be actively or passively managed. Equity mutual funds can be categorized based on market capitalisation, investment style, and geography of investments. Based on market capitalisation they can be large cap funds, mid cap funds, small cap funds, and multi cap funds. Another category of equity funds are sector-specific funds that invest in specific sectors like FMCG or banking. There are also international funds that invest in stocks of overseas companies. Equity-linked savings schemes also come under equity mutual funds. They invest more than 80% of their assets in equity and have a diversified portfolio. They also qualify for tax deductions under 80C.
How do the Best Equity Mutual Funds Work?
Fund managers pool money from multiple investors to form an equity mutual fund. Equity mutual funds can be actively or passively managed. %p In the case of actively managed funds, the fund managers do extensive market research to pick stocks for the portfolio. Passively managed funds imitate the portfolio of a benchmark index. No research goes into it. For actively managed funds, fund managers use multiple strategies like top-down, bottom-up, growth, or value strategy to select stocks for the portfolio. Fund managers also try to combine multiple asset classes to maximize the returns of the fund. Even in equity funds, a portion of assets can be allocated to debt or may be held in cash for catering to redemption.
For the services, the fund managers charge a fee. This fee is called the expense ratio. It consists of brokerage, administrative cost, commissions, investment management charges, and marketing and distribution costs.
The expense ratio is calculated as a percentage of NAV. Riskier the asset class is, higher will be the expense ratio. Hence an equity fund will have a higher expense ratio than a debt fund.
Who should Invest in the Best Equity Mutual Funds?
Primarily, equity mutual funds are for investors who are willing to take moderate to high risk and want to grow their money in a way that it stays ahead of inflation. Equity mutual funds are suitable only for long term investment horizons, and investors with a long investment haul can invest in these. The wide range of equity mutual funds cater to different investment needs. The ELSS schemes are the best tax saving schemes under Section 80C. These come with a lock-in period of 3 years, which is the lowest lock-in compared to other schemes. ELSS funds can offer higher returns over the long term compared to other investment options under Sec. 80C . For new and long term investors seeking equity exposure, the best choice would be large cap mutual funds. For investing veterans, diversification with equity for the long run will generate good portfolio returns. They can choose from categories like mid caps, small caps, and diversified equity funds.
Things to consider while investing in the Best Equity Mutual Funds
Equity mutual funds invest in the shares of companies. The very nature of equity mutual funds makes them volatile and potentially high risk. Therefore, before adding one such fund to the investment portfolio,every investor needs to consider the following aspects.
Investment Objective
Always linking investment to a financial goal is the best way of investing. Equity mutual funds are ideal for long term goals. Identify long term goals and pick the best-suited equity mutual fund as they can generate wealth during the period.
Fund Objective
The differentiating factor in choosing the right category among different equity mutual funds depends on the fund objective. Best equity mutual funds are structured to accumulate wealth through strategic investments. Each fund manager has his style of stock picking. It can be either growth investing or value investing. Therefore, aligning both investment objectives and fund objectives is essential.
Fund Type
The different types of equity mutual funds are large cap, mid cap, small cap, and multi cap. Each of these categories serves a different objective. Large cap funds invest in the top 100 companies by market capitalisation. They hence are least risky amongst other equity funds categories. Small and mid cap funds carry the highest risk, while also offering high returns. Multi cap funds invest across market capitalisations and provide a more diversified option for the investor.
Investment Horizon
Equity mutual funds are only for long term investment horizons. These funds are highly volatile in the short run. To earn good returns, the investor has to stay invested for a minimum of 5 years. The long haul averages out the risk and has an excellent potential to earn a higher return.
Risk
Mutual fund investments are subject to market risk. Amongst all the categories of mutual funds, equity mutual funds are the riskiest. Equity funds are affected by NIFTY and Sensex movements. The market fluctuations have a very high impact on the funds. Only with a long term investment horizon, this risk can be minimized.
Cost
For actively managed equity mutual funds, SEBI has capped the total expense ratio at 2.5%. Fund houses also charge exit load for redeeming investments before a specific period. For equity, it is mostly one year, and 1% is charged for all withdrawals before one year.
How to choose the Best Equity Mutual Funds?
Every investor is unique, and what works for one investor may not work for the other. But there are specific rules of thumb that every investor can follow to select the best equity mutual funds that suit their criteria.
Define investment objectives
Investors need to know what their financial goals are and how much it will cost. The time duration for achieving the goal, the investment horizon, and the type of investment (SIP or lumpsum) are somethings the investor has to figure out. Once the investors are clear about this, they can move to the next step.
Identify how comfortable you are with risk
Investors need to access how they will react to slight fluctuations in the market. Will they be okay with losses in the short term? Will they be willing to invest for longer horizons despite drastic market movements?
Analyze performance
Analysing the fund's performance is very important. Investors invest in good returns. Fund return is all that they look at. The fund should be able to earn returns that are consistently outperforming the benchmark and its peers over a period of 5 years.
Fund history
Investing in a fund that comes from an old and reputed fund house is essential. This builds investor confidence that the fund house can handle the performance of the fund in any market condition. The fund house should have a clean business with no track of any fraud.
Manage risk
Mutual funds are subject to market risk. Hence, investors have to consider the risk-return ratio.
Expense ratio
The expense ratio of the fund is calculated as a percentage of the NAV. The returns of the fund are affected. Hence investors have to be careful while choosing a fund. Choose a fund with a lower expense ratio.
Taxation
Equity mutual funds are taxed based on the holding period of the investment. In the short term (less than one year), the gains are taxed at 15% (plus 4% cess). In the long run, the gains above INR 1,00,000 are taxed at 10% (plus 4% cess). 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.
Some of the Best Equity Mutual Funds in India
Some of the best equity mutual funds to invest in are
