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Equity Mutual Funds

What is an Equity Mutual Fund?

An Equity Fund, also referred to as a Growth Fund, can be defined as a Mutual Fund Scheme that invests in stocks and shares of companies of various market capitalisation. It is aimed at generating higher returns as compared to Fixed Deposits and Debt Funds. Equity fund investments offers you the exposure to a wide array of stocks by investing a minimal amount.

Equity Funds are classified into two categories – Active Fund and Passive Fund. In the case of Active Funds, a Fund Manager researches companies to analyse the performance of their stocks and decide on the best ones to invest in. In contrast, in the case of Passive Fund, the Fund Manager builds a portfolio following a market index like Nifty Fifty or Sensex.

Equity Funds can also be broken down basis Market Capitalisation, that is, the value of a company's equity as per the capital market. These classifications are small and medium cap, large cap, multi cap, etc.

Equity Funds can be classified into other categories as well basis the new norms laid down by SEBI (Securities and Exchange Board of India) and released on 6th October, 2017. It has had a relook at the available schemes in the market and re-categorised them into ten classifications. While certain schemes that previously existed have undergone minor amendments, some others have been re-defined from scratch. Resultantly, banks and financial institutions that offer Equity Funds have changed names and merged their schemes to align them with the norms laid down by SEBI.

How do Equity Funds work?

An equity fund invests at least 60% of its assets in equity shares of companies of different market capitalisations in varied proportions as per the investment mandate. The portfolio may comprise of a particular category of equity funds or may be a blend of different market capitalisation, depending on whether the investing style is value-oriented or growth-oriented.

After a major portion of equity shares have been allocated, the remaining amount can be invested in money market or debt instruments. This effectively addresses the redemption requests from investors. The shares/stocks in the portfolio are bought and sold by the Fund Manager to ensure a healthy circulation of equity funds that will help in making the most of the changing market movements.

The consistent buying and selling of equity shares affect the expense ratio of equity funds. The upper limit of expense ratio has been capped at 2.5% for equity funds by SEBI and is planning to control it further. A lower expense ratio indicates proportionately higher returns for investors.

Who Should Invest in Equity Funds?

Your decision to invest in equity funds is determined by your investment horizon and risk appetite.

Investing in Equity Funds is suitable for:

  • Investors who would like to invest for at least 5 years. This is not suitable for investors who are looking for short-term investments owing to stock market fluctuations.

  • ELSS or Equity Linked Savings Schemes are recommended as the most suitable type of Equity Fund for investors planning to save taxes under Section 80C of the Income Tax Act, 1961. This is because it not only allows the shortest lock-in period of 3 years, but also offers higher returns as compared to other investments eligible under Section 80C.

  • Large-cap equity funds are advisable for budding investors looking for exposure to the stock market. These are known to offer stable returns over the long-term as they invest in equity shares of the leading 100 companies of the stock market.

  • Diversified equity funds are well suited for investors who have considerable exposure in the stock market and are confident enough to take calculated risks. These funds invest in shares belonging to companies across market capitalisation. They are a mixture of high return yet lower risk as compared to equity funds that invest only in small-caps or mid-caps.

Types of Equity Funds

Equity funds differ basis their investment mandate and the type of fields and stocks they invest in. The following are the categories introduced by SEBI.

  • Multi Cap Funds: These Equity Funds are mandated to invest at least 65% of their total assets in stocks across large-caps, mid-caps and small-caps.

  • Large Cap Funds: As the name suggests, these funds invest only in large-caps with minimum investment on large-caps being at least 80% of the total assets. These schemes invest in leading companies that ensure lower risk as compared to small and mid-cap schemes.

  • Large and Mid-cap Funds: This is one of the new categories introduced by SEBI. These schemes invest in both large-cap and mid-cap stocks, with minimum investment of 35% in large-caps and 35% on mid-cap stocks.

  • Mid Cap Funds: As suggested by the name, these schemes invest in mid-cap stocks, investing at least 65% of the total assets in the same. As they invest on mid-sized companies, the risk factor is comparatively more than that of large-caps. However, when they realise their full potential, they offer great returns.

  • Small Cap Funds: These schemes invest a minimum of 65% of the scheme’s total assets on small companies. These are accompanied by risks greater than in large-caps and mid-caps, therefore, they offer great returns on the realisation of their full potential.

  • Dividend Yield Funds: This is one of the new categories introduced by SEBI. It invests in dividend yielding stocks, that is, stocks that pay dividends periodically.

  • Value Funds: Here, the schemes follow the value style of investment, that is, the Fund Manager invests in stocks that he/she feels are undervalued in the capital market. These are required to maintain a 65% allocation to equities.

  • Contra Funds: These schemes abide by the contrarian investment strategy, when it either witnesses exuberant demand from investors or is shunned by them at a particular point in time due to short-term triggers. The asset’s poor performance or outperformance leads to distortion in valuations, which is what a contra fund or its fund manager seeks to capitalise on. These schemes are mandated to maintain a minimum 65% allocation to equities.

  • Focused Funds: These schemes mention the market cap that it has decided to focus on and invests in a maximum of 30 stocks in the same.

  • Sectoral/Thematic Funds: As evident from then name, this scheme invests in a theme or a sector of its choice. It invests a minimum 80% of their assets in equity. These are usually considered risky for retail investors because the returns are determined by how the sector fairs.

  • ELSS: This is a tax-saving mutual fund scheme with a lock-in period of 3 years and is mandated to maintain a minimum investment of at least 80% of the total assets in equities.

Benefits of Equity Mutual Fund Investments

The wide range of Equity Mutual Funds schemes offered by Fund Houses and financial institutions make it a challenge to select one that meets unique individual needs. Therefore, you need to research well to gain a thorough knowledge about the different available schemes, its features and benefits, and be well aware of the background of the fund houses and financial institutions offering them. This will enable you to take an informed decision. You also need to decide whether you would like to oversee your investment portfolio all by yourself or hire a capable Funds Manager to maintain your portfolio on your behalf.

The benefits of investing in Equity Mutual Funds are:

  • Encourages systematic investments
  • Efficient financial management
  • Cost-effective
  • Flexible
  • Hassle-free
  • Offers liquidity

Performance of Equity Funds in India

Equity Funds have been found to deliver the highest returns among all the categories of mutual Funds. It boasts of before-tax returns of 10%-12 on an average, liable to fluctuate as per capital market movements and overall economic conditions.

Select your category of Equity Funds carefully, so it offers return that is aligned with your financial goals. Research carefully and keep a close tab on dominant stock market trends to take a well thought-out decision.

Taxation of Equity Funds

Capital gains are earned on redeeming units of Equity Funds. The rate of taxation for these redeemed capital gains is calculated basis your holding period, that is, the length of your tenure for equity fund investments. These capital gains can be broken down into two classifications:

  • Short-term Capital Gains (STCG): Capital gains with a holding period of up to 1 year and chargeable at a rate of 15% are referred to as Short-term Capital Gains.

  • Long-term Capital Gains (LTCG): Capital gains with a holding period of over 1 year are referred to as Long-term Capital Gains. According to the recent changes, as declared in the Budget 2018, LTCG of more than 1 lakh will be taxed at 10% devoid of the benefit of indexation.

There are both non-tax saving and tax-saving equity funds. An example of tax-saving equity fund is ELSS. Investing in an ELSS can help you save on taxes up to Rs. 45,000 and avail deduction of up to Rs. 1.5lakh.

Top Equity Mutual Funds to Buy

The illustration below will give you a comprehensive idea about the recommended schemes that you can purchase from in these 6 categories Large Caps, Mid and Small Caps, Diversified Equity, Thematic – Infrastructure, ELSS and Index.

LARGE CAPSMID & SMALL CAPSDIVERSIFIED EQUITYTHEMATIC INFRASTRUCTURE ELSSINDEX
ICICI Pru Bluechip Fund (G)HDFC Small Cap Fund (G)Motilal Oswal Multicap 35 - (G)DSP BR Natural Resources - Regular (G)IDFC Tax Advantage (ELSS)-RP (G)Kotak Nifty EFT
IDFC Focused Equity - Regular (G)Kotak Emerging Equity (G)Principal Emerging Bluechip (G)IDFC Infrastructure - Plan A (G)
Invesco Growth Opportunities Fund (G) L & T Midcap Fund (G)Principal Multi Cap Growth Fund (G)
SBI Blue Chip Fund (G)Tata Equity P/E Fund (G)

Let's take a closer look at the current performance of each of the equity mutual funds mentioned above, all of which are ranked No. 1 by CIBIL.

Large-caps

  • ICICI Pru Bluechip Fund (G): With assets of Rs.13,068.39 Crore as on June 30, 2018, its return in 3 years standing at 9.6%.

  • IDFC Focused Equity - Regular (G): With assets worth Rs.1,332.54 Crore as on June 30, 2018, its 3-year return being 11.2%

  • Invesco Growth Opportunities Fund (G): Worth Rs.437.94 Crore as on June 30, 2018, its 3-year return standing at 10.6%

  • SBI Blue Chip Fund (G): Worth Rs.14,027.55 Crore as on June 30, 2018, its 3-year return is 8.7%

Mid and small caps

  • HDFC Small Cap Fund (G): It has an asset value of Rs.2,867.01 Crore as on June 30, 2018, giving 17.1% in 3 years

  • Kotak Emerging Equity (G): Rs.2,976.62 Crore asset value as on June 30, 2018, it is has fetched a return of 11.55% in 3 years

  • L&T; Midcap Fund (G): Rs.2,306.33 Crore worth of assets as on June 30, 2018, its 3-year return stands at 14.8%

Diversified Equity

  • Motilal Oswal Multicap 35 - (G): With assets worth Rs.7,777.54 Crore as on June 30, 2018, its 3-year return is 12.5%

  • Principal Emerging Bluechip (G): Assets worth Rs.1,513.98 Crore as on June 30, 2018, it has fetched a return of 13.3% in 3 years

  • Principal Multi Cap Growth Fund (G): With assets worth Rs.632.43 Crore as on June 30, 2018, the 3-year return is 11.7%

  • Tata Equity P/E Fund (G): Rs.3,325.77 Crore worth of assets as on June 30, 2018, the returns in 3 years is 15.1%

Thematic – Infrastructure

  • DSP BR Natural Resources - Regular (G): Assets worth Rs.1,256.12 Crore as on June 30, 2018, it has fetched a return of 18.2% in 3 years

  • IDFC Infrastructure - Plan A (G): Asset worth Rs.989.28 Crore as on June 30, 2018, it’s return in 3 years is 6.8%

ELSS

  • IDFC Tax Advantage (ELSS)-RP (G): Assets worth Rs.1,256.12 Crore as on June 30, 2018, it has fetched a return of 9.7 in 3 years Index

  • Kotak Nifty EFT: Assets worth Rs.525.36 Crore as on June 30, 2018, its 3-year return is 13.3%

FAQs on Equity Mutual Funds

How do equity mutual funds work?

An equity fund invests at least 60% of its assets in equity shares of companies of different market capitalisations in varied proportions as per the investment mandate. The portfolio may comprise of a particular category of equity funds or may be a blend of different market capitalisation, depending on whether the investing style is value-oriented or growth-oriented.

After a major portion of equity shares have been allocated, the remaining amount can be invested in money market or debt instruments. This effectively addresses the redemption requests from investors. The shares/stocks in the portfolio are bought and sold by the Fund Manager to ensure a healthy circulation of equity funds that will help in making the most of the changing market movements.

The consistent buying and selling of equity shares affect the expense ratio of equity funds. The upper limit of expense ratio has been capped at 2.5% for equity funds by SEBI and is planning to control it further. A lower expense ratio indicates proportionately higher returns for investors.

What is a diversified equity mutual fund?

Equity Mutual Funds diversifies investments throughout the stock market aiming to achieve maximum gains for investors. As suggested by the name, this scheme does not belong to a specific large-cap, mid-cap or small-cap. With this scheme, investments can be made in companies irrespective of their size and industry specialisation.

What is an equity fund?

An Equity Fund, also referred to as a Growth Fund, can be defined as a Mutual Fund Scheme that invests in stocks and shares of companies of various market capitalisation. It is aimed at generating higher returns as compared to Fixed Deposits and Debt Funds. Equity fund investments offer you the exposure to a wide array of stocks by investing a minimal amount.

What is an equity and debt mutual fund?

An Equity Fund, also referred to as a Growth Fund, can be defined as a Mutual Fund Scheme that invests in stocks and shares of companies of various market capitalisation. It is aimed at generating higher returns as compared to Fixed Deposits and Debt Funds. Equity fund investments offer you the exposure to a wide array of stocks by investing a minimal amount.

Debt Mutual Funds refer to a mixture of investments in corporate debt papers or fixed income government securities (G-Secs) like Treasury Bills, Corporate Bonds, Government Securities, Money Market instruments and such other debt securities across time horizons. These are long-term corporate debt papers.

What are the various types of equity?

Equity funds differ basis their investment mandate and the type of fields and stocks they invest in. The following are the categories introduced by SEBI.

  • Multi Cap Funds: These Equity Funds are mandated to invest at least 65% of their total assets in stocks across large-caps, mid-caps and small-caps.

  • Large Cap Funds: As the name suggests, these funds invest only in large-caps with minimum investment on large-caps being at least 80% of the total assets. These schemes invest in leading companies that ensure lower risk as compared to small and mid-cap schemes.

  • Large and Mid-cap Funds: This is one of the new categories introduced by SEBI. These schemes invest in both large-cap and mid-cap stocks, with minimum investment of 35% in large-caps and 35% on mid-cap stocks.

  • Mid Cap Funds: As suggested by the name, these schemes invest in mid-cap stocks, investing at least 65% of the total assets in the same. As they invest on mid-sized companies, the risk factor is comparatively more than that of large-caps. However, when they realise their full potential, they offer great returns.

  • Small Cap Funds: These schemes invest a minimum of 65% of the scheme’s total assets on small companies. These are accompanied by risks greater than in large-caps and mid-caps, therefore, they offer great returns on the realisation of their full potential.

  • Dividend Yield Funds: it is another of the new categories introduced by SEBI. It invests in dividend yielding stocks, that is, stocks that pay dividends periodically.

  • Value Funds: Here, the schemes follow the value style of investment, that is, the Fund Manager invests in stocks that he/she feels are undervalued in the capital market. These are required to maintain a 65% allocation to equities.

  • Contra Funds: These schemes abide by the contrarian investment strategy, when it either witnesses exuberant demand from investors or is shunned by them at a particular point in time due to short-term triggers. The asset’s poor performance or outperformance leads to distortion in valuations, which is what a contra fund or its fund manager seeks to capitalise on. These schemes are mandated to maintain a minimum 65% allocation to equities.

  • Focused Funds: These schemes mention the market cap that it has decided to focus on and invests in a maximum of 30 stocks in the same.

  • Sectoral/Thematic Funds: As evident from then name, this scheme invests in a theme or a sector of its choice. It invests a minimum 80% of their assets in equity. These are usually considered risky for retail investors because the returns are determined by how the sector fairs.

  • ELSS: This is a tax-saving mutual fund scheme with a lock-in period of 3 years and is mandated to maintain a minimum investment of at least 80% of the total assets in equities.

How do you find equity?

Total equity of a company can be calculated using this simple formula:

Equity = Assets – Liabilities

Total assets less total liabilities is the value of equity. If this value is in the negative, it denotes that the company has no equity and that it is in the red.

What is the common equity?

Common equity is the amount that has been invested in a company by all common shareholders. This amount includes the value of the common shares as well as additional paid-in capital and retained earnings.

How are equity oriented mutual funds taxed?

In case equity mutual funds that are held for less than a year, the gains are treated as short-term capital gains and are taxed at the rate of 15%. When it's held for a year or more, the gains are treated as long-term capital gains. LTCG from equity mutual funds which is greater than Rs. 1 lakh would be taxed at the rate of 10% without any indexation benefit. Dividends from equity mutual funds, although tax-free in the hands of the investor, are liable for a 10% dividend distribution tax. Should the equity mutual funds be invested on or prior to 31 January 2018, the gains until that date will be tax exempt.

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