Mutual Funds are a type of financial investment vehicle that pool together funds from multiple investors.
In this article
1) What are Equity Mutual Funds?
2) Benefits of Equity Mutual Funds
3) Types of Equity Mutual Funds
4) Taxation of Equity Mutual Funds
There are many different types of mutual funds based on the securities that they invest in. For example:
- Equity mutual funds invest in direct equity i.e. stocks
- Debt mutual funds invest in bonds, treasury bills, CDs etc
- Gold mutual funds invest in gold.
Today we will discuss the most lucrative mutual fund type in India - Equity Mutual Funds.
What are Equity Mutual Funds?
Equity mutual funds are mutual funds that primarily invest in equities (stocks) of various companies across market capitalization in an attempt to generate high returns. Hence equity funds are also called as stock funds.
Since equity mutual funds invest in ‘equity holdings’ or rather stocks of companies, they carry the highest risk. They, therefore, have the potential to deliver higher returns compared to debt or any other money market funds.
To minimise the huge exposure to risk & earn high returns, the fund manager spreads out your investments across stocks of various companies.
For any mutual fund to be categorized as an ‘Equity mutual fund’, it must invest a minimum of 65% of its assets in equity and equity-related investment schemes. The balance is maintained as cash for immediate liquidity requirements.
Benefits of Equity Mutual Funds
The benefits offered by equity mutual funds are:
Expert management: Equity funds are monitored by experts with an immense knowledge of mutual funds.
Tax benefit: ELSS (Equity Linked Savings Scheme - type of equity fund) offers tax benefit of up to ₹ 46,800/- by investing ₹ 1,50,000/-
Diversification: This reduces the risk exposure of equity funds due to the widespread of your investments across stocks of various companies.
High Returns Potential: Since equity mutual funds majorly invests in stocks, they have high returns potential.
Convenience: One can invest in one-go or like an instalment with lump sum or SIP investment option.
Liquidity: The redeemed amount from equity funds are credited to your bank account in three days.
Affordable: One can start investing in equity mutual funds with as little as ₹ 500/-.
Read a detailed article on advantages & disadvantages of equity mutual funds, for better understanding.
Types of Equity Mutual Funds
Equity mutual funds are categorised into types depending upon the management style, market capitalisation, redemption, investment style, and sectors & themes.
Equity funds based on management style are categorised as actively managed and passively managed funds.
- An actively managed fund is taken care of by fund managers or expert management deciding where to invest the fund’s money.
- Passively managed funds, on the other hand, are composed just as that of a market index due to which these funds follow the same index trend. There is no management involved in passively managed funds.
Market capitalisation is the total value of a company’s shares. As per SEBI , market capitalisation can be divided as:
- 1st 100 companies – Large Cap
- 101st to 250th companies – Mid Cap
- 251st companies onwards – Small Cap
Equity mutual funds can be categorised on the basis of redemption - Closed Ended Schemes and Open Ended Schemes
- Close Ended Schemes: Investors can invest in close-ended equity mutual funds only during the NFO open period. Close ended equity mutual funds have a fixed maturity date, before which investors cannot redeem their holdings. While close ended mutual funds are listed on the stock exchange, they have very low liquidity.
- Open Ended Schemes: In this scheme, an investor can buy and sell units anytime throughout the year. There is no restriction on the entry and the exit. These funds offer highest liquidity as they can be redeemed as per the daily NAV.
There are 3 types of equity funds based on the investment style. These are:
- Growth Funds: Growth funds contain stocks of those companies which are expected to grow faster than the market average.
- Value Funds: Value funds are those funds which have a great potential but are undervalued.
- Contra Funds: Contra funds are based on ‘against-the-wind’ type of investment style or in simpler terms, not to follow the herd mentality.
Sectors & Themes
Equity mutual funds that focus on a particular sector or theme such as infrastructure, pharma, healthcare etc are known as sectoral or thematic equity funds.
Sectoral and Thematic mutual funds carry very high risk and are suitable for aggressive investors with a long time horizon.
Read a detailed article on types of equity mutual funds.
Taxation of Equity Mutual Funds
Equity mutual funds are taxed as per the Long Term Capital Gain (LTCG) & Short Term Capital Gain (STCG) norms.
If investors hold equity mutual funds for more than a year then returns are subject to LTCG tax i.e 10% tax if capital gains are over ₹ 1 Lakh in a financial year.
Whereas if investors hold equity mutual funds for less than a year then returns are subject to STCG tax i.e flat 15%.
Some equity funds offer a major tax benefit under the Section 80C of the Income Tax (IT) Act. Investments made in these equity funds, known as ELSS funds, one can avail tax benefit of ₹ 46,800/- on investment amount of ₹ 1.5 Lakhs.
Open a free mutual fund investment account with India’s best mutual fund distribution platform & get started with your investment in equity funds today.