All About Equity Mutual Funds

All About Equity Mutual Funds
March 22, 2022

All About Equity Mutual Funds

What is an Equity Mutual Fund?

Equity mutual funds invest in stocks and companies across all market cap. They are known to be the riskiest asset class among all types of mutual funds. Potentially, equity mutual funds provide higher returns than other funds which of course come in with high risk. 

How do Equity Funds Work?

Equity mutual funds invest at least 60% of their total assets in equities of many companies in suitable proportions. The asset allocation is decided to depend upon the investment objective of the fund. The remaining portion of the funds may be invested in debt and money market instruments. The fund manager takes a call on whether to buy new holdings or sell the existing holdings of the fund based on the changing market movements and plans to reap maximum benefits. 

Features of Equity Investing

#1. Expense Ratio

As per the regulations issued by SEBI, the expense ratio of an equity mutual fund cannot exceed 2.25%. How often does the fund manager buys and sells the equity shares can impact the expense ratio of the equity funds. Lower the expense ratio, higher the returns for investors.

#2. Holding Period 

For how long the investor is staying invested in the fund is called the holding period. The holding period decides the rate of taxation. Equity holdings that are held for one year or less are considered short-term investments and are taxed at 15%. Equity funds held for more than a year are termed as long term, and the long-term gains are taxed at the rate of 10% and that only if the gains exceed 1 lakh.

#3. Diversification

Equity funds give the benefit of investing in various stocks in a cost-efficient way.

Types of Equity Funds

Equity funds are categorized based on the stocks they invest in and the investment mandate.

#1. Based on sectors and themes

Equity funds that focus on 1 to 3 specific sectors such as FMCG, Pharma, agriculture, banking sector, and more all under sector funds category. While, thematic funds focus on specific ideas or themes such as emerging consumer companies, commodity stocks and more. Sector funds are riskier than thematic funds because if a sector is not performing well in which the fund has invested then the fund might show bad performance. On the other hand, thematic funds are less risky as they invest in different stocks from different sectors which helps to mitigate the risk.

#2. Based on market capitalization

Large cap equity funds: large cap companies are well established and so there is a good chance that such funds have the capability to provide stable returns.

Mid cap equity funds: These funds invest in medium sized companies which are not as stable as large cap funds.

Mid and small cap funds: these funds invest in small and medium sized companies and have the potential to provide high returns.

Small cap funds: This category invests in small companies and is riskier than medium and large cap funds. But they also have the potential to earn high returns. 

Multi cap funds: Multi cap funds invest in stocks across all market capitalizations. There is a restriction to invest a minimum of 25% in each market cap category i.e. across large cap, mid cap, small cap. 

Flexi-cap funds: A Flexi-cap fund has the freedom to invest in the proportion of the portfolio in any market cap without restriction.

Don’t forget to check: Advantages and Disadvantages of Mutual Funds

#3. Based on investment style

The above funds follow an active investing pattern where the fund manager decides the composition of the portfolio. There are also few funds that imitate a certain index. These funds are called index funds. For example, The Sensex index fund invests in all the companies present in the Sensex index. As the index funds follow an index, it does not require active participation from the fund manager making them low-cost funds.

ELSS (Equity Linked Savings Schemes)

This fund invests at least 80% of its assets in equity and equity-related instruments. These kinds of schemes can be open-ended or close-ended. Also, ELSS schemes qualify for tax deduction under section 80C with an overall limit of Rs1.5 lakhs. The amount invested in ELSS is deducted from the taxable income and this helps to lower the amount of income tax an investor is liable to pay. Investments in ELSS are subject to a 3-year lock-in period. 

The benefit of investing in equity funds is that one doesn’t need to worry about choosing stocks and sectors one needs to invest in. Stock picking is done by an expert fund manager in equity mutual funds. This saves a lot of time and effort for an investor in terms of researching the stocks and sectors.