Learn about Equity Mutual Funds

Equity Funds are a type of mutual funds that predominantly invest in equity shares of listed of companies. These funds give individual investors access to diversified portfolios of equities without the necessity of buying individual stocks. The performance of an equity fund largely depends on the movements of the stock market and the specific stocks within its portfolio. Investors choose equity mutual funds for capital appreciation and earn potentially higher returns than fixed-income or debt investments, albeit with higher associated risks.

One of the main benefits investing in equity funds is the professional and expert management of your investments. Another advantage risk reduction attributed to the diversified nature of these funds. If one were to replicate such diversification by directly investing in stocks, it would necessitate a significant capital outlay. However, by pooling resources from various investors, equity mutual funds achieve this diversification even with smaller individual contributions. Additionally, rigorous regulations ensure transparency and consistent reporting for these funds.

Types of Equity Mutual Funds:

Categorisation or the types of equity mutual funds can be multifaceted. They can be classified based on the market capitalisation of the stocks they invest in, the investment style of the portfolio, or their geographical focus. Thus, some funds focus solely on Indian companies (domestic), while others invest internationally, targeting broad markets, specific regions, or even individual countries. Further specialisation can be found in sectoral funds that zero in on industries like health care, real estate, or commodities. According to SEBI Scheme Categorisation, there are 12 sub-types of equity funds.

Source: SEBI Circular, 6th October 2017.

Sectoral/Thematic funds have many popular variants.

There are two major parts how equity mutual funds work.

In the first part, as an investment vehicle, the equity fund collects money from multiple investors and issues them units. Each unit is measured in NAV (net asset value). As the investment value goes up or down, the NAV is also impacted and moves in a similar direction. The investors can contribute money either in a lump sum or through systematic investment plans (SIP) in an equity fund.

Now in the second part, a professional team manages the fund. The team has multiple roles; for example, one person or group manages the fund, called fund managers. What is meant by managing the fund is that the fund manager/(s) will give direction on which stocks to buy or sell and in what quantity from the stock exchanges like BSE (Bombay Stock Exchange) and NSE (National Stock Exchange). They are also responsible for the research and the performance of the fund. Then there is a team that executes the orders given by the fund manager/(s); these are part of the operations team. Also, a team ensures that all the procedures are followed while placing the order and during execution that all the checks and balances that SEBI has set in have been complied with.

The NAV is calculated daily after deducting the fund's liabilities and expenses known as total expense ratio or TER. And Any dividends or returns earned from the stocks are either reinvested in the equity fund or distributed to the investors.

Equity funds can be accessed either directly through an Asset Management Company (AMC) or via a mutual fund distributor/ advisor or through the branches or digital platforms of other mutual fund intermediaries or exchanges. Before investing in an equity fund, it's mandatory to complete the Know Your Customer (KYC) process. This involves filling a KYC form, submitting proof of identity, proof of address, and photograph either to the AMC or the Registrar and Transfer Agent (RTA). If you're working with a mutual fund distributor, they can guide you through the KYC procedure. Additionally, you'll need to furnish your bank details for mutual fund transactions. After ensuring your KYC compliance, you're all set to invest in equity mutual funds.

You should select an equity fund suitable for your investment needs and risk appetite. In this stage, you should understand your financial goals, risk appetite, and investment horizon. You should consult with your financial advisor or mutual fund distributor if you need help in selecting the right equity schemes that suits your needs.

Features of an Equity Fund:

Some of the key features of an equity fund is that they invest predominantly in stocks or equities and there is an equity fund for various types of investors. While a risk-averse investor can choose equity schemes that invests in large-cap, and a high-risk investor can choose to invest in small-cap funds and sectoral/thematic funds. So, depending on the risk appetite and investment horizon of the investor, equity mutual fund schemes can be chosen.

Equity funds typically spread their investments across a variety of stocks. This diversification can be across sectors, geographies, or market caps. Also, fund managers can have different styles of managing funds, like value, growth, quality, etc.

Liquidity is another attractive feature of equity schemes; you can conveniently redeem your investments based on the prevailing net asset value (NAV), allowing relatively easy access to your funds. Additionally, equity funds offer flexibility in investment approaches. You can opt for lump-sum investments or systematic investment plans (SIPs), which enable periodic and disciplined investing.

Benefits of investing in Equity Mutual Funds:

• Historically, over a long period, equity markets have provided returns that outpace inflation and other asset classes. And equity mutual funds are among the best vehicle to invest in and be a part of the wealth creation journey.
• One of the principal benefits is the professional management they offer. You may lack the time or expertise to analyse individual stocks. This is where equity funds step in. Seasoned money managers with vast expertise, experience, and resources oversee them. Their primary role is continuously evaluating, purchasing, selling, and overseeing investments to meet the fund’s objective.
• Another benefit is the risk diversification that equity fund provides. Investing in equity mutual fund schemes naturally diversifies one's investment across various sectors and companies of different market capitalisations. This diversification ensures your capital is not concentrated in a single sector or stock or market capitalisation, safeguarding them from the vulnerabilities of individual securities. For instance, if one portfolio component faces market challenges, other elements might remain unaffected, ensuring the entire investment isn't jeopardised.
• Investment in an equity fund is affordable and convenient. Directly purchasing a gamut of individual securities might be expensive for many. However, equity mutual funds offer a more economical entry point, making it feasible to invest smaller sums.
• Lastly, some equity mutual fundschemes, like the Equity Linked Savings Schemes (ELSS), come with notable tax benefits. Investments up to ₹1,50,000 in ELSS qualify for tax deductions under Section 80C of the Income Tax Act, 1961. Holding mutual fund investments for extended periods also offers tax efficiencies, amplifying the returns on investment.

Taxation rules of Equity Funds:

Equity mutual funds invest over 65% of their corpus in stocks. If you choose to sell your holdings in such a fund within a year, the gains you realise are considered short-term and are taxed at a fixed 15%, regardless of your personal tax bracket.

Conversely, if you hold onto your equity fund units for more than a year before selling, the gains you accrue are deemed long-term. The first Rs 1 lakh of these long-term gains is exempt from tax. However, any gain beyond this amount is subjected to a 10% long term capital gain (LTCG) tax.

As for dividends from an equity fund, they're taxed based on your personal tax slab. If the dividend amount exceeds Rs 5,000, a 10% tax is deducted at the source.