Equity Mutual Funds: Meaning, Types, Benefits, and Investment Guide
Equity mutual funds are the perfect gateway for investors who wish to earn profits by investing in the stock market. The risk is taken by professionally run institutions on behalf of the investor, as a portion of the money pooled in is utilized to purchase shares of multiple companies.
But first one must know what is equity mutual fund, learn about their types and benefits before jumping into investing. In addition, one must also be aware of the difference between an equity fund and a mutual fund.
What Is an Equity Mutual Fund?
An Equity Fund is a collective investment scheme wherein the collective money of multiple investors is utilized to purchase shares from various companies.
The Equity Fund is managed by professionals called fund managers, wherein they research and analyze the stocks based on several factors in order to choose which stock to invest in according to a predetermined benchmark.
For example, when an investor invests ₹5,000 in an equity mutual fund, their share in the total investment corpus determines the value of the investment and therefore, the profit or loss earned.
This type of investment is perfect for those who are looking to stay invested in the market for a long time horizon, are comfortable taking risks in the short term and understand and are aware of the stock market fluctuations.
How Do Equity Mutual Funds Work?
Equity mutual funds work by gathering the funds of multiple investors and investing in stocks according to a set benchmark. In return, investors are given units which are based on a predetermined price called a Net Asset Value (NAV).
A NAV basically represents the total assets of a scheme less total liabilities as of any given day; investors receive payouts when there is an increase in their NAV. A decrease in NAV happens when the value of the underlying assets falls (e.g. stocks). Therefore, investors earn when their mutual fund scheme’s NAV appreciates, while the opposite is true for a depreciating NAV.
It should be noted, however, that in the process of buying or selling a stock, the value of a scheme is susceptible to change, therefore, returns are never guaranteed.
Explore mutual fund NAV and returns on Rupix and confirm scheme details in the latest AMC factsheet.
Different Types of Equity Mutual Fund
Equity mutual funds mostly fall under 6 broad categories of schemes based on an investment strategy or criteria.
1. Large Cap
These funds mostly invest in the top 100 companies (by Full Market Capitalization) as ranked by the NSE. These companies tend to be more stable than mid or small-cap companies.
2. Mid Cap
As in large cap funds, these funds mainly focus on companies that rank 101 to 250 by Full Market Capitalization (also NSE).
These funds typically have an exposure of at least 65% to mid-cap companies (by Full Market Capitalization) in the portfolio.
3. Small Cap
These mostly invest in companies ranked between 251 and below by Full Market Capitalization (NSE).
Funds in this category typically hold at least 65% in small-cap companies. These have the potential to create a higher return on investment but come with substantial risk.
4. Flexi Cap
These funds follow an investment approach similar to flexi-cap funds, covering companies across different market capitalizations.
This helps the fund manager to be flexible with respect to the portion allocated to each fund category.
5. Sectoral/ Thematic funds
As the name suggests, investment in these funds is done in a particular sector or theme (ie. banking, technology, healthcare, renewable energy, etc.) There is typically a higher risk as the majority of the fund is placed in a single area.
6. ELSS
Tax-saving or Equity-Linked Savings Scheme funds are taxed differently under the Indian taxation system under section 80C wherein there is a 3 year locking in period as well. The tax-free investment limit for an ELSS is up to ₹1.5 Lakh.
See SEBI’s mutual fund categorisation circular for category definitions and allocation requirements.
Equity Fund vs Mutual Fund
While the novice investor may confuse this, what one must know is that equity funds are a kind of mutual fund. These kinds of funds primarily invest in stocks whereas mutual funds invest in a mixture of stocks, debt instruments, money market instruments, and other assets.
Here is a table that shows the difference between Equity Fund vs Mutual Fund.
| Features | Equity Fund | Mutual Fund |
| Investment | Primarily Company Stock | Equity, Debt ,Money Market, Other Assets |
| Risk | Generally Higher | Depends on category of fund |
| Return | Market-linked | Depends on category of fund |
| Objective of funds | Primarily for capital appreciation | For capital appreciation, revenue, etc. |
| Suitability | should be for long time horizon | Depends on category of fund |
Therefore, the Equity Fund vs Mutual Fund comparison becomes easy when one knows about these two basic fund categories.
Benefits of Investing in Equity Mutual Funds
Investing in equity-oriented mutual funds offers several key benefits to investors.
Some of the benefits of an equity mutual fund are:
- Professional Management: Equity funds are handled by professional fund managers who make investment decisions, saving investors time and effort. The fund managers do the job for you wherein their expertise comes in handy when buying and selling stocks on your behalf. The research the fund managers do to buy stocks in order to beat the market makes equity funds one of the best stock market investments.
- Diversification: When you invest in an Equity Fund, the money you invest is spread across multiple stocks and therefore reduces an investor’s risk significantly as opposed to buying a stock on your own
- Long-Term Wealth Building: As equity funds allow investors to participate in the upside potential of the stock market, they can help them grow wealthy.
- Flexible Investment: Investors can choose between a Systematic Investment Plan (SIP) or a lump sum basis, depending on their preference and their risk appetite.
- Easy to Access: Most mutual funds in this category make it easy for investors to invest by using only minimal amounts.
While these are some of the biggest benefits, it must be noted that this form of investment always comes with risk: it isn’t a sure shot way of earning money.
Risks of Equity Mutual Funds
Risks associated with equity mutual funds are similar to those of direct stock investments. Here are some of the various risks that investors might face.
- Market Risk: Stocks are subject to market volatility and can lose value due to varying economic conditions or other factors pertaining to a company’s performance.
- Risk of Volatility: Mutual funds can experience significant fluctuations in their share prices, especially over a short period of time.
- Risk of Concentration: Sector-specific funds carry an element of risk as changes taking place within the sector can affect the whole fund.
- Risk of No Guaranteed Returns: Past performance doesn’t ensure future performance, and investors aren’t guaranteed any profits from this kind of investment.
How to Invest in Equity Mutual Funds?
When an investor wants to invest in equity mutual funds, he or she must follow a series of steps.
Some of these steps to invest in equity mutual funds are:
Set financial goals – Understand what you want to achieve through your investment.
Risk profile – Determine your risk-taking ability.
Fund comparison – Compare investment objectives and portfolio composition.
KYC procedure – Complete the Know Your Customer procedure.
Method selection – Choose between a lump sum or SIP investment method.
Monitoring – Watch your investment without getting caught up in the volatility of the market.
With these simple steps, an investor is well on their way to building that profitable portfolio!
Taxation of Equity Mutual Funds
It is essential that one knows about the taxation structure of an equity mutual fund before one decides to invest.
For qualifying equity oriented funds, the Short Term Capital Gains Tax (STCG) for unlisted units is generally 20% on units held for less than 12 months. While it is 12.5% on long term capital gains (LTCG) on listed and qualifying units, where eligible LTCG (after adjusting for LTCG exemption of ₹1.25 Lakhs) is more than ₹1.25 Lakhs in a fiscal year.
Note, that additional charges (eg. Surcharge, cess, etc.) will apply in some cases depending on certain criteria.
Refer to the Income Tax Department’s capital-gains guidance and obtain advice for your circumstances.
Conclusion
Equity mutual funds offer a way to invest in stocks with low risk as opposed to taking charge of buying and selling individual stocks.
Understanding all that there is to know about equity mutual funds such as what is equity mutual fund and the types of equity funds might help the novice investor to make meaningful investment decisions.
Whether you are new to investing or have been doing so for a while it is always vital to choose an Equity fund that aligns with your financial and investing goals.
FAQs
An equity mutual fund typically collects the money of multiple investors and invests in the shares of one or more companies for their capital appreciation.
Yes, equity mutual funds are a great option for beginners who have a long term outlook on their investment horizon and understand the risk and volatility of the stock market.
An equity fund is different from a mutual fund in that these funds primarily invest in stocks whereas mutual funds invest not only in stocks but in other assets such as debentures, money market instruments, etc.
Typically, yes, you can invest lower amounts such as ₹500 in equity mutual funds via a SIP although it depends on the mutual fund scheme chosen by the investor.
Equity mutual funds are regulated investment instruments offered by financial institutions but one must note that investing in these kinds of funds always come with an element of risk.
Generally, it is advised to invest in an equity mutual fund for a longer time period of at least 5 years. However, the returns on investment aren’t guaranteed and depend on market fluctuation.
Investors can typically sell or withdraw from an open-ended equity fund; ELSS funds carry a lock-in period of 3 years.
Investing via SIP or a lump sum depends on the financial profile of each investor.
