An equity mutual fund invests, well, in equities or stocks. Equity mutual fund schemes should invest at least 65% of their corpus in equities and equity-related instruments, according to the Indian market regulator SEBI.
All about equity mutual funds
Equity funds come in all shapes and sizes. Generally speaking, they are classified based on the market capitalization of the companies they invest in. Accordingly, an equity mutual fund falls under one of the categories discussed below.
Types of equity mutual funds
Large-cap funds
Large-cap funds invest a sizable portion of their assets in firms having large market capitalization. Large companies tend to be more stable compared to smaller firms.
Mid-cap funds
Mutual funds in this category predominantly invest a significant portion of their assets in equity shares of mid-cap companies.
Mid-caps tend to be more volatile than large-cap companies but have more growth potential.
Large- and mid-cap funds
This is a hybrid fund category that is neither fully large-cap nor mid-cap. In fact, the funds come with minimal risk because of large-cap stocks. At the same time, the mid-cap stocks in the portfolio offer high growth potential. In the Indian context, these funds generally invest in the top 250 companies.
Small-cap funds
These funds invest at least 65% of the assets in equity shares of small-cap companies. Essentially, they invest in stocks outside the top 250 universe. Small-cap funds offer reasonable returns, but are more volatile than large-cap and mid-cap funds.
Multi-cap funds
Based on the relevant market conditions, these invest their assets in all types of companies— large-cap, mid-cap, and small-cap. As a result, you, as an investor, get a chance to invest in a diversified portfolio across market capitalization.
Benefits of equity funds
Diversification
Equity funds invest across diverse economic sectors, giving your portfolio good exposure. Besides, you get to invest in companies with varying market capitalizations. Diversification will help you spread risks.
Better inflation-adjusted returns
Equity mutual funds can give you better inflation-adjusted returns than traditional investment avenues, as equities have historically generated good returns from market-related investments. Equity funds can help increase your capital over a period of time.
Expert management
A skilled fund manager can generate alpha for your portfolio. They wisely deploy your money in the market and monitor it diligently.
Convenience
Equity mutual funds offer you many modes of investment, such as Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP), and Systematic Transfer Plan (STP). You can choose between these schemes for ease of investment.
Tax benefits
Specific equity mutual fund investments can help you reduce your tax liability. For instance, with investments in Equity-Linked Savings Schemes (ELSS), you can avail tax deductions under Section 80C of the Income Tax Act.
Equity mutual fund taxation
If the scheme units are held for less than twelve months, profit is computed as short-term capital gains and taxed at 15%. On the other hand, when these are held for over 12 months, the gains are computed as long-term capital gains, taxed at 10% on amounts exceeding ₹1 lakh in a financial year. Consult your CA to be absolutely sure.
Conclusion
We have discussed equity funds and the advantages of investing in them to grow wealth over a period of time. They come with lower risks, offer you a wide range to choose from, and in some cases, allow you to save on taxes. Equity funds do deserve a prominent place in your portfolio.
FAQs
How do equity funds work?
Equity mutual funds invest in different categories of stocks, such as large-cap, mid-cap, and small-cap. Depending on your risk appetite, you can choose any of these types.
Are equity funds a good investment option?
If you are an investor, you would know how good they are as investments. Unlike traditional savings instruments, these are capable of generating inflation-adjusted returns.
What is the difference between equity funds and debt funds?
The major investment of these funds is in company stocks. Debt funds invest in fixed-income securities, including bonds, commercial papers, certificates of deposit, T-bills, and government securities.
Who should invest in equity mutual funds?
If you want to build a corpus over a period of time, you might consider investing in these funds. Remember that the scheme you select should be based on your risk appetite, investment horizon, and objective.
What is the meaning of equity mutual fund?
An equity mutual fund is a type of mutual fund that primarily invests in stocks. It offers investors an opportunity to participate in the stock market’s potential returns.
What is the difference between an equity and a mutual fund?
Equity is a type of investment representing ownership in a company, while a mutual fund is a pool of money from multiple investors invested in various securities.
Which is best equity fund or SIP?
Choosing between equity funds and SIP depends on your investment goals. Equity funds offer ownership in stocks, while SIP is a systematic investment approach, providing regular investments.
What is the difference between equity and balanced mutual funds?
Equity funds primarily invest in stocks, offering high returns with higher risk. Balanced funds invest in a mix of stocks and bonds, providing a balance between risk and returns.
