Equity Funds – Things to know before Investing
Before getting to know what equity funds are, let’s first know what mutual funds are.
A mutual fund is a company that collects money from investors and invests that amount in securities such as stocks, bonds, and short-term money market instruments. All the holdings of the mutual fund together are known as its portfolio which is managed by qualified and experienced personnel known as a fund manager. Each security held by the investors by investing in a mutual fund represents their part ownership in the fund and the income generated henceforth.
Likewise, an equity mutual fund scheme invests predominantly in a set of stocks. Depending on the investment objective, the investment strategy of the fund, the fund manager may invest your funds in pooled assets in a category of stocks.
Benefits of Equity Mutual Fund
Investing in equity mutual funds offers several advantages.
Equity Funds invest in a range of securities which lowers the risk if any security fails to perform. If you directly invest in stocks, you may not be able to invest in many securities to add to your portfolio. Thus, an equity mutual fund brings diversification to your investment portfolio and safeguards your investment objective.
2. Professional Management
Majority of the investors lack the necessary knowledge and skill required to get the best from an investment. By investing in a mutual fund, dedicated skilled professionals are appointed by the mutual fund houses to track the prospects and potential of the companies by continuous research and monitoring.
3. Lower entry level
Investment in equity mutual funds is possible with as low as Rs. 500, which is especially encouraging for investors interested in taking exposure to the stock market with a small amount of mone.
4. Plans & Services by Mutual Fund Houses
If you invest directly in the stock market, you will be deprived of the innovative plans offered by the mutual fund companies. Investment in equity mutual funds offer automatic re-investment plans, systematic investment plans (SIPs), systematic withdrawal plans (SWPs), asset allocation plans, etc. to help you efficiently manage your portfolio along with sound financial planning.
Such plans allow investors to easily enter/exit funds, or switch from one fund to another which probably will never be possible with direct investment in stocks.
Types of Equity Mutual Funds
As per the SEBI categorization of mutual fund schemes, equity mutual funds can be classified into 10 different sub-categories.
- Large-cap Fund – Invests minimum 80% in large-cap stocks.
- Large & Midcap Fund – Invests minimum 35% in large-cap companies and simultaneously maintain a minimum 35% allocation to mid-cap stocks.
- Midcap Fund – Invests minimum 65% in mid-cap stocks.
- Small-cap Fund - Invests minimum 65% in small-cap stocks.
- Multi-cap Fund - Invests minimum 65% across large cap, mid cap, small cap stocks.
- Dividend Yield Fund - Invests minimum 65% in dividend yielding stocks.
- Value/Contra Fund - Invests minimum 65% in equity by following the value/contrarian investment strategy.
- Focused Fund – This scheme focuses on the number of stocks (maximum 30), and invest a minimum of 65% of its assets in equity & equity related instruments.
- Sectoral/Thematic Fund - The investment in equity & equity related instruments of a particular sector/particular theme (like banking, FMCG, etc.) should be a minimum of 80% of total assets.
- ELSS (Equity Linked Savings Scheme) - Invests minimum 80% of total assets in equity & equity related instruments (as per the Equity Linked Saving Scheme, 2005 notified by Ministry of Finance) with a statutory lock-in of 3 years and offer tax benefit under section 80C.
Taxation of Equity Mutual Funds
Returns from Equity Mutual Funds are considered as capital gains and are treated the same. Returns from the redemption of equity mutual funds held for less than a year are considered as short-term capital gains and are taxed at 15% whereas the gains rose from the sale of equity investments held for one year or more attract tax at 10% on the gains in excess of Rs. 1 lakh.
Top Equity Mutual Funds India of 2019
- Mirae Asset Emerging Blue-chip-Reg(G)
- Reliance Large Cap Fund(G)
- Canara Rob Emerge Equities Fund-Reg(G)
- HDFC Equity Fund(G)
- Aditya Birla SL Equity Fund(G)