A mutual fund is an investment platform where various investors pool their money together to achieve a common investment goal. There is a fund manager for each mutual fund who then utilises all this money to invest in equities. As the name suggests, the profit and loss earned in mutual fund investments are shared by all the investors involved. The higher the percentage invested, the higher the profit, and vice versa.
Now, let's focus on what an equity fund is!
Equity fund investment means investing in the stocks of a company. In layman's terms, an equity fund is a type of mutual fund. It is a bit risky as compared to mutual fund investments. Equity funds are also referred to as stock funds because they principally deal in stocks. If you are looking for a long-term wealth creation investment plan, investing in equity funds can be your ideal choice.
Equity funds require your utmost patience. In the short term, the returns on equity investment may suffer turbulence, which is when you must be patient. Withdrawing money during lows can only bring you loss. Keeping your money invested for at least 4-5 years is when you’ll start reaping the benefits. But before you start investing, it is essential that you also understand the various types of equity investments.
On various grounds, equity funds are divided as:
The following are the types of equity funds depending on the market capitalisation invested by the companies
It involves companies with the largest market capitalisation that offers comparatively stable returns.
Companies that have lesser market capitalisation as compared to large caps. However, they offer a higher return as compared to large-cap companies.
It refers to the companies other than those in the list of top 250 companies on the stock market. They may offer higher returns but also include high risk.
When it comes to the diversification of the equity funds, there are different varieties to it, like
It is a type of investment where the investors invest in different sectors of all sizes.
Focused equity investment involves investment in specific industries with a concentrated portfolio.
It focuses on stocks that are currently offering discounts but have long-term investment potential.
Such investments are focused on the leading equity funds across the globe.
These are types of equity funds based on themes and sectors. Thematic funds focus on a set of industries with a particular theme like digital, steel, energy, etc. On the other hand, sector themes are not as wide as compared to thematic ones. Sectoral equities focus on specific sectors like pharma, banking, IT, etc.
Whether you are a beginner or a professional, there are some basic advantages of equity funds that you will enjoy when investing in them.
Let's have a look at the benefits of equity mutual funds.
The equity mutual funds are spread across, and investments are made in multiple stocks of different sectors. This diversifies the risks arising out of the investment. If any particular stock underperforms, it is easily covered up by the stocks performing well. This advantage leads to getting good returns overall.
Expert Fund Managers are professionals appointed by the fund houses to manage the mutual funds. Their main job is to manage funds to generate profit at all costs. They are experts in managing money and are assisted by a team. They are well aware of how to identify the best return-generating funds.
Investors are provided with a wide range of choices to invest in. One can invest in equity, gold, debts, liquid assets, etc. Investors can choose according to their needs and risk capacity. They are also given additive options to choose from a wide range of options within the specific asset class, like small and mid-cap funds under equity funds. This leads to a reduction in the risks significantly.
Equity funds are one of the best options for fulfilling your long-term financial goals. Investors can easily chalk out a plan to invest systematically as per their needs. A good, efficiently planned investment for the long run is sure to give back a good return.
Taxation on Equity mutual funds depends on several factors, like the type of equity fund, the tenure of your investment and the type of gains you received.
There are broadly two types of gains, dividend (the profit made through investing in a scheme) and capital gains (profit made by selling your capital asset). On both of these gains, taxes are levied.
Dividend gains exceeding ₹5000 in a financial year are charged 10% tax. On the other hand, if your capital gain exceeds ₹1 lakh in a financial year, it is taxable. For short-term capital gain (STCG), there is a 15% tax, and for long-term capital gain (LTCG), there is a 10% tax. Hence, the longer you remain invested, the lesser tax you pay.
There are a few essentials that you must keep in mind while investing. Read the pointers below to understand in detail-
You will be bearing the risk depending on the type of equity investment. So, you must analyse your risk appetite before making a new investment in the stock market or mutual fund. If you are a beginner, you can begin with low-risk investments and gradually widen your risk appetite.
Some people tend to invest for a particular financial goal they wish to achieve in the future. If you are also one of them, then take a break, sit with a pen and paper and note down your goals. Accordingly, you will have to decide the type of investment and the time you can give for it to grow.
This is one crucial decision you need to make. Under a regular plan, your investment is planned and executed by a fund manager. So, you also have to pay the commissions. Under a direct plan, you do everything from your end, from researching to choosing the type of equity investment and finally investing. Hence, you pay no extra commission to anyone.
You must understand that mutual funds are not intraday trades where you can make instant profit. In order to make an exceptional profit, you have to stay invested for 3-5 years or more. So, make sure you have that much time.
You may choose any plan you wish to. However, to make a maximum profit under mutual funds, it’s advisable to choose long-term plans.
There are so many Asset Management Companies to choose from before investing. Hence, you must read the performance history, market reviews, and potentiality of the particular AMC before finalising it.
Some of the equity mutual fund schemes may charge you an exit load. So, if you are not 100% sure you can stay invested for the long term, make sure you go with a scheme that does not charge any exit load.
The fund manager makes a big difference in your investment returns. It is the fund manager who is ultimately going to do the research and invest and decide the advantages of mutual funds you are going to make. So, choose wisely.
Here are some commonly used terms in the world of mutual and equity fund investments. To ease your understanding, we have mentioned a few here-
Equity funds are a good option if you’re looking for high returns. But you also need to be mindful of the risks that it brings with them. The best way you can maximise out of investing in equity mutual funds is by staying invested for as long as you can with a minimum period of 3-5 years. It’s a game of patience and the adage of “patience is a virtue” will hold true for you as an investor.
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Mutual funds perform best when you stay invested for the long term. You have the option for short-term investments as well. Although they have high risk, they also offer high returns. However, the chances of suffering loss become negligible when you stay invested for longer. So, you can say that long-term equity fund investment is quite a safe option.
There are various AMC that offer equity fund investment options. Depending on the companies, the minimum investment amount may vary. However, on a major ground, the minimum equity fund investment amount can be as low as ₹100.
An investor can choose either an online or offline method of investing in equity mutual funds. Here is the process-
You can also invest via mobile applications of your preferred AMC or third-party applications.
Yes. You can withdraw your invested money from equity funds anytime you want. However, an exception is the ELSS (Equity Linked Savings Scheme) which has a lock-in period of 3 years. Under any circumstances, the money invested in an ELSS equity fund cannot be withdrawn before three years. Also, some equity fund schemes may ask for an exit load for withdrawing before maturity.
The profit earned through equity fund investment is taxable. Tax is charged on both dividends and capital gains. Earlier the dividend was tax-free, but now, as per the amendments, dividends are also taxable as per the investor's tax slab. Short-term capital gains are charged with 15% tax, and long-term gains beyond ₹1 lakh attract 10% tax.
There are several types of equity funds in India, some of the main types are:
a. Large-cap funds: These funds invest in large and well-established companies that have a market capitalization of over Rs.10,000 crores.
b. Mid-cap funds: These funds invest in companies that have a market capitalization between Rs. 2,000 crores and Rs. 10,000 crores.
c. Small-cap funds: These funds invest in companies that have a market capitalization of less than Rs. 2,000 crores.
d. Value funds: These funds invest in companies that are undervalued by the market and have a lower price-to-earnings ratio.
e. Growth funds: These funds invest in companies that are expected to grow at a faster rate than the market.
f. Sectoral funds: These funds invest in specific sectors, such as technology, healthcare, or real estate.
g. Index funds: These funds track a specific market index, such as the Nifty 50 or the BSE Sensex.
h. Tax-saving funds: These funds, also known as Equity-Linked Savings Scheme (ELSS), are equity-oriented mutual funds that provide tax benefits to investors.
i. International funds: These funds invest in the stock of companies listed outside India.
Equity funds, like other investment options, are subjective to your investment goals. The best fund for you would be the one that suits you best. When choosing an equity mutual fund, it's important to consider your investment goals, risk tolerance, and time horizon. Different types of equity mutual funds have different characteristics and may be better suited for different investors.
