Equity Mutual Funds- What is Equity Fund, Types and More

What is an Equity Fund

An Equity Fund is a type of Mutual Fund in which substantial primary investment (to the tune ranging from 65% to 80%, depending upon the market capitalization of companies) is made into the equity shares of various listed companies. The main aim of investing in such Mutual Funds is to earn from a diversified portfolio of equities in the form of dividends and capital appreciation. The value of units in Equity Mutual Funds is determined by its Net Asset Value (NAV) which is a reflection of net assets minus net liabilities divided by the total number of outstanding shares.

An Equity Mutual Funds is different from a regular equity investment in the sense that no single equity needs to be bought in absolute figures but based on a set percentage of the sum invested. These funds fall under the umbrella of open-ended schemes which means they do not have a fixed maturity period and are a highly liquid type of investments. However, the equity market should always be trodden with caution as it is also subject to market inefficiencies and fluctuations, and thus, can be a risky pursuit. 

How do Equity Mutual Funds Work

Equity Mutual Funds have a diverse portfolio of equities of various companies which are chosen and often customized as per the portfolio requirements or financial targets set to be achieved by the investor. Equity Mutual Funds are comparatively high risk and reward funds, which are fairly volatile depending upon certain parameters such as the prevailing market conditions. Funds are raised from small investments taken from a large universe of retail investors. The collected money is pooled into an investment corpus which is further invested in the capital market. NAV is used as an indicator to calculate the growth and market performance of the Mutual Funds, just as the market price of stocks.

The minimum primary investment requirement in equities for Equity Mutual Funds is fixed at 60%, as per the SEBI MF Regulations of 1996. The remaining portion can be variously invested in other securities such as money market and debt instruments, basis the purpose of investment. However, a substantial investment of each Equity Mutual Funds is into equity stocks due to the fact that the primary purpose of such funds is to earn money from capital appreciation and dividends. 

All the income derived by Equity Mutual Funds is distributed to the unit holders cum investors in the form of dividends after meeting the expenses of the fund if the investor opts for the dividend option. The income retained is further invested into new stocks, which appreciates the value of the units of the Mutual Fund.  

Who Should Invest in Equity Mutual Funds

Equity Mutual Funds are apt for investors with a high risk appetite. Equity investments are the riskiest investment since they are affected directly by the performance of the stock market. Thus, investors who have substantive amounts of funds to invest in for a long period of time should go ahead with these funds.

Investors usually focus on the potential upside while investing in Mutual Funds. While this is the ultimate goal of investing, there’s an important catch here. No financial instrument that has a possibility of taking a steep jump in a given time horizon, is free of the risk of falling as steeply or maybe worse. Given the highly sensitive stakes of companies in the economy, companies can make or break overnight.

The seasoned investors can venture into highly volatile Small-cap and Mid-cap Equity Mutual Funds, which lately are also being traded in large volumes. These have the potential of multiplying manifold, that too in a short to medium period, obviously subject to financial technicalities and market risk. Needless to say, these are good investment options if they are being managed by expert fund managers.

The amateur investors should stick to the highly secure Large-cap or Hybrid Equity Mutual Funds, to preserve their capital. In addition to good dividends, there are good capital gains too in these funds if kept for the long term. Investors should not take unwarranted risks and should keep a diversified portfolio while investing in Equity Mutual Funds. Preferably inclusion of debt investments could be an important step in reducing overall risk and increasing diversification of the portfolio. The adverse market movements are easy to offset as there are certain fixed-income instruments that are known for capital preservation while also earning interest incomes such as government bonds and bank fixed deposits. The interest rates of these instruments and yield factors also tend to become attractive when the equities market turns bearish, as everyone shifts their portfolio towards these instruments to reduce risk.

Types of Equity Funds

There are various types of equity investments. Equity Mutual Funds can be categorized on numerous basis. Some of the common categorization basis are as below:

On the basis of Investment Strategy

The investment strategy chosen by the fund manager plays a vital role in achieving the defined goals, as the focus of choosing the equity basket changes. These strategies can be as follows:

• Top-down or Sectoral/Theme Fund: This is when the industry is chosen first owing to its attractiveness in the given market scenario, and then the stocks are picked.
• Bottom-up or Company-specific Fund: This type of strategy picks the company first maybe because of its exceptional fundamentals, irrespective of the industry it is from.
• Value or Contra-Equity Fund: This strategy involves picking the stocks which have a very lucrative price point that is highly under-valued and has a great potential of upside.
• Growth or Focused Fund: In the growth strategy, those equities are chosen which have shown a stable market performance in the past and there’s a reasonable prospect of the same trend to be continued in the future.

On the basis of Market Capitalisation

There are multiple kinds of Equity Mutual Funds based on their degree of market-cap categorization, which is explained below:

1. Small-cap: These are the companies that are ranked beyond 250th in terms of total market capitalization as per SEBI guidelines. The minimum exposure requirement in Small-cap companies for a Mutual Fund to be a Small-cap Mutual Fund is 65% of total assets. These are highly risky but equally rewarding if it matches the risk appetite.
2. Mid-cap: These are the companies that are ranked between 101st -250th in terms of total market capitalization. The minimum exposure requirement in Mid-cap companies for a Mutual Fund to be a Mid-cap Mutual Fund is 65% of total assets. These are riskier than Large-cap Mutual Funds but safer than small-cap Mutual Funds.
3. Large-cap: These are the companies that are ranked between 1st-100th in terms of total market capitalization. The minimum exposure requirement in large-cap companies for a Mutual Fund to be a Large-cap Mutual Fund is 80% of total assets. These are by far the safest investment options in terms of Equity Mutual Funds as compared to Mid-cap and Small-cap Mutual Funds as companies in these funds are those which are industry leaders.
4. Multi-cap: These types of Mutual Funds have varying choices for primary investments from among the above-mentioned types of funds, depending upon the market conditions and the investment style or prudence of the fund manager. They must maintain a minimum of 65% in equity and equity-related instruments.

Benefits Of Equity Mutual Funds

If certain basics for research and vigilance are kept in mind, investors are bound to bag the various advantages of investing in the booming equities market. The advantages of Equity Funds are as listed below:

1. Equity Mutual Funds usually have a low expense ratio as it is capped at 2.5% of the Equity Mutual Funds by SEBI.
2. Capital appreciation can be achieved through Equity Mutual Funds as these usually give considerably higher returns as compared to inflation.
3. It is a great avenue for a diversified portfolio with good revenue prospects.
4. Most professional fund managers actively manage these funds to stay on top of the market conditions.
5. Since the holding timelines for equities are small, and one can avail LTCG benefits as low as beyond one year of investment, these funds are naturally very attractive investment options.
6. There is an option to invest via small instalments in the form of SIPs or through a lump sum, whatever is the preference.
7. Equity Mutual Funds investments are highly liquid investments because of good trading volumes from retail as well as institutional investors.

Tax Benefits of Equity Mutual Funds

Equity Mutual Funds are one of the most beneficial financial instruments in terms of the tax benefits that are available from these investments.

1. Exemption u/s 80C

There is a specific tax-free instrument for investing in Equity Mutual Funds called Equity Linked Savings Scheme (ELSS). There is a lock-in period of 3 years to avail a tax exemption of Rs. 1,50,000 annually under this scheme.

2. Capital Gains Tax

• Short term capital gains are applicable on holdings of up to 1 year and are taxed at the rate of 15%.
• Long term capital gains are applicable on holdings beyond a period of 1 year with an exemption limit for gains of up to Rs. 1,00,000. The gains beyond the exemption limit are taxed at 10% without indexation benefit.
• With abolishment of Dividend Distribution Tax (DDT) in the hands of corporates distributing dividends, the dividend now becomes taxable in the hands of investors as per their applicable slab rate. 

SIP or Lumpsum – Which one is Better

There is no such thing as fewer savings, as long as savings are being made. So, the choice between SIP and Lumpsum is not about which one is better, rather which serves a better purpose for you as an investor. Let us delve into the nitty-gritty of the question at hand.

• SIP stands for Systematic Investment Plan and can be chosen to invest a fixed sum of money at regular intervals say weekly, monthly, or quarterly. This makes a good option for people saving up from salaries or other recurring income from various sources and investing in Mutual Funds. It can be as low as Rs. 100 however the minimum investment differs from scheme to scheme.
• Lumpsum is a one-time payment option and can be made keeping in mind various tax exemptions limits.

Frequently Asked Questions (FAQs)

1. Is it Safe to Invest in an Equity Fund?

It is safe to invest in Equity Mutual Funds as they are a highly regulated financial instrument. However, it must be kept in mind by the investor that Equity Mutual Funds are subject to volatility as the market scenario is constantly changing and evolving, sometimes performing well and at times not so much.

2. What is the Minimum Amount to Invest in an Equity Fund?

The minimum investment in Equity Mutual Funds via a SIP could be as low as Rs. 100 onwards as this varies from scheme to scheme. Since there’s no upper limit, investors are free to divert their idle funds to Mutual Funds investments for good returns.

3. How to Invest in an Equity Mutual Fund with Nivesh?

Any investor can enjoy the benefits of investing through Nivesh in the following easy steps:

• Create an account in Nivesh by providing your basic KYC details. (If you already have an account then just login into your account)
• On your portfolio page click on the Buy New tab at the right top corner of the screen.
• Select the category and choose the funds you want to purchase.
• If you already know the name of the fund to buy, then you can search the particular fund through Quick Order.
• Fill the transaction details and confirm. You can place up to 5 orders in one go.
• You can make payment through your registered account through UPI, Direct Pay, or NEFT/ RTGS , Bank Mandate or Cheque. For same-day NAV, select UPI, Direct Pay or NEFT / RTGS as other payment options may take a few days to clear, Nodal account takes about 1-2 days to clear payment from the approved mandate and cheque takes about 2-5 days in clearing due to which you will not get the same-day NAV.

4. Can we Redeem Equity Mutual Funds Anytime?

There is a restriction on withdrawal up to 3 years of investment in an ELSS scheme, due to the lock-in period of 3 years. However, if the investor does not wish to reap benefits under Income Tax Act, 1961, then he may withdraw funds earlier. Apart from this, there’s no other restriction from the withdrawal of investment in Equity Mutual Funds.

5. Is There any Tax on Equity Mutual Funds?

Tax is applicable on both dividend income and capital gains from Equity Mutual Funds, which is taxed as per the type of income. Still, there are some exemptions under section 80C and an exemption of Rs. 1 Lakh for retail investors on capital gains, if such funds are held for more than one year.