Equity Mutual Funds

Equity funds harbour long-term capital growth through funds concentrated in equity-oriented securities. Simply put, investments are primarily made in the stock market. 

Equity funds focus on specific market themes and sectors to build an undiluted portfolio. On the other hand, equity funds can also widen the investment horizon by dealing with numerous themes and sectors which help in portfolio diversification. 

Equity funds are suitable for those with a higher risk tolerance and an aim to build a corpus over a long-term basis. Additionally, equity linked schemes can bring benefits such as tax exemptions, inflation-beating returns, etc. 

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What are Equity Mutual Funds?

Equity mutual funds are an investment product that invests predominantly, as much as 60%, in different company stocks. Here, money is invested in different stocks of the companies listed on the exchange. The stocks chosen are dependent on the investment objective of the underlying equity mutual fund scheme. 

 

Naturally, the equity funds’ returns are market-linked, making these funds risky investments. You can choose from a variety of equity mutual funds by determining your investment objective and mapping the risk associated with it. 


However, when the goal is to maximise your returns, a long-term equity mutual fund has historically proven to be the best option.

How do Equity Funds Work?

As mentioned earlier, equity-based mutual funds are those that predominantly invest in company stocks. So, by investing in equities, you become a shareholder of said company. 

 

First of all, you need to select the category of the fund in which you wish to park your funds. These can be based on investment style (large-cap, mid-cap, or small-cap). These categorisations matter because they impact risk profiles, investing costs, and more.  

 

Once you have defined the category of the fund, the fund manager and his team decide on which stocks to pick for investment. They research and analyse different market-related aspects and put your money in stocks that have a higher probability of yielding higher equity funds’ returns. 

 

Their role does not come to an end here as they continuously track stock performance and make adjustments to strategy. If companies or sectors don’t perform as expected, these managers make insight-driven decisions and alter course. 

 

Note that as only a major portion of your money is invested in equities, the remaining amount can be invested in other segments of the market.

Types of Equity Funds

Equity mutual funds are classified into different types based on three categories – diversification, investment style, and taxation.

  • Based on Diversification

     

The following are the types of equity funds based on diversification:

 

  1. Large-cap Funds: Large-cap Funds are those that invest 80% of the total assets in large and established companies (top 100 firms in terms of market capitalisation). These funds are generally less volatile and offer high returns.

  2. Mid-Cap Funds: Mid-cap Funds are those that invest 65% of the total assets in mid-capitalisation companies (i.e., top 101-250 companies). These funds have a higher risk compared to Large-cap Funds but can generate higher returns too. 

  3. Large and Mid-cap Funds: These funds invest 35% of assets in large and mid-capitalisation companies. 30% of the assets are invested in companies other than large and mid-cap companies or the money/debt market.

  4. Small-cap Funds: These funds invest 65% of assets in small-cap companies (Under the Top 250 Companies). This fund carries a great deal of risk, but you can earn significant returns too.

  5. Multi-cap Funds: These funds invest in all Large, Mid, and Small-cap companies. According to the SEBI, these need to invest 25% each in Large, Mid, and Small-cap companies.

  • Based on Investment Style

     

The following are the types of equity funds based on investment style:

 

  1. Thematic Funds: Thematic or sectoral funds are those that invest 80% of their assets in a particular theme or sector.

  2. Dividend Yield Funds: These are low-risk funds that invest in dividend stocks that offer higher yields.

  • Based on Taxation  

     

Equity-Linked Savings Scheme (ELSS) is a tax-saving mutual fund scheme that has a fixed lock-in period of three years. It offers tax-saving benefits under Section 80C of the Income Tax Act of 1961.

Features of Equity Funds

Here are some of the features associated with investing in equity funds:

 

  1.  Associated Risk: Equity mutual funds have a moderate to high risk associated with them. You can diversify your portfolio to spread the risk over equity, debt, and money market instruments.
  2. Expense Ratio: The regulatory authority SEBI has put a cap of 2.5% on the expense ratio of equity mutual funds. A lower expense ratio translates into higher returns for investors.

  3. Portfolio Diversification: Equity funds allow you to diversify your portfolio by investing in companies of different cap sizes and across sectors. A balanced portfolio ensures that your returns are not gravely impacted when markets are down.

Benefits of Investing in Equity Funds

The following are some of the benefits you get to enjoy when investing in equity-based mutual funds:

 

  1. Managed by Experts: Equity mutual funds are managed by qualified fund managers who are generally experts in dealing with equity markets. These managers research the market and park your money in funds that may offer higher returns.   

  2. Easy Investment: You can invest in equity mutual funds through the Systematic Investment Plan (SIP). This allows you to make contributions to equity funds in terms of monthly investment starting from ₹500.

  3. Tax Benefits: With the Equity-Linked Savings Scheme (ELSS), you can enjoy tax deductions of up to ₹1.5 Lakhs under Section 80C of the Income Tax Act of 1961.

  4. Better Returns: In comparison to other traditional investment options, these offer higher equity funds’ returns. However, note that these funds have higher risk associations too.

  5. Liquidity: Other than ELSS, the equity funds do not have any lock-in period and can be redeemed anytime.

Taxation on Equity Funds

If you hold an equity fund for less than a year, the profits you earn are taxed at 15% as considered as Short-term Capital Gains (STCG). However, if you hold your investment for more than a year, the returns are taxed at 10%, considered as Long-term Capital Gain (LTGC).

Risks Associated with Equity Funds

The returns on equity mutual funds are not guaranteed, and the returns are linked to market performance. It also involves a risk of losing the principal. Equity funds’ returns are based on the following factors:

 

  • Fluctuations in interest rates

  • Change in forex rates

  • Modification in government policies and taxation

  • Political and economic factors

     

In conclusion, investment in equity funds is one of the best options to diversify and generate wealth over a range of investment windows. However, in general, long-term equity mutual funds are your safest bet if you want to secure returns. 

 

When investing in equity mutual funds, you must also assess the risk associated with it. With everything in order, you can get started easily on Bajaj Markets. All you have to do is visit the official website, open an account online or via the smartphone app, and start investing. 

 

The process is quick, easy, and you pay 0% commission on your mutual fund investments.

Frequently Asked Questions About Mutual Funds

Are equity mutual funds a good investment option?

Yes, equity funds are a great option for you if you want to diversify and invest in the market for higher returns. Do note that you will need to take on some amount of risk to invest in equity mutual funds as these instruments are volatile. Earning returns is not guaranteed at any stage.

What is the minimum monthly contribution I can make toward my equity funds?

What is the difference between equity funds and debt funds?

How is ELSS different from other types of equity funds?

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