Equity mutual funds is the most preferred asset class for investment. Equity mutual fund helps investors to get higher return by taking higher risk. Therefore, equity mutual fund has both pros and cons.
What is equity mutual fund?
It is a mutual fund scheme, which invest 65% or more of its fund in shares of different companies in stock market. In other words, equity mutual fund is a scheme which invest majority of its fund in equity or shares of different companies.
The objective of equity mutual funds is to gain capital appreciation through participation in stock market and help investors in wealth creation.
Equity mutual funds are suitable for long term investment for specific goals.
Types of equity mutual funds
There are varieties of equity mutual funds. Investors can choose a category based on his/her objective, risk appetite and tenure of investment. The major categories of equity mutual funds are as below:
Market capitalisation
Equity mutual funds schemes are categorised based on market capitalisation or market cap
Large cap fund
This kind of fund invest 80% of its fund in equity shares of Top 100 companies in terms of market capitalisation. These companies are well established with proven track records. The value of shares of these companies are less volatile and has potential to offer adequate returns.
Mid cap fund
This kind of fund invest minimum 65% of its fund in equity shares of Top 101 – 250 companies in terms of market capitalisation. These companies are well established with proven track records, but lesser than large cap companies. Though the value of shares of these companies are volatile and has potential to offer adequate returns.
Small cap fund
This kind of fund invest minimum 65% of their funds in equity shares of companies whose market cap is 251 and below in ranking. These companies are more volatile than mid cap companies, but has potential to give reasonable returns.
Multi cap funds
These funds invest across large cap, mid cap and small cap minimum 25% in each category as per SEBI rules.
Sectoral funds
These funds invest minimum 80% in a particular sector or industry like pharmaceutical, banking, IT, FMCG etc. It identifies the growing industries and invest in companies associated with this industry.
Thematic funds
This kind of fund invest minimum 80% of its fund on a particular theme like ESG (Environmental, Social, Governance), Consumption, life science etc. It is more diversified than sectoral fund as it can invest in multiple sectors based on the theme of the fund.
Focused fund
A focused equity fund invests a minimum of 65% of its fund in equity and equity related instruments and invests in maximum 30 stocks across market capitalization.
Contra fund
This kind of fund invest a minimum of 65% of its fund in equity and equity related instruments in shares of companies, which are currently not favorable. But, the fund manager believe that there is intrinsic value and over long run the value will go up.
Tax saving fund
Equity Linked Saving scheme is a tax saving fund. Investment in these scheme are deductible from income under section 80C. These fund offer dual benefit of capital appreciation and tax exemption. However, there is a lock-in period of 3 years.
Benefit of equity mutual fund
Diversification
Equity mutual funds allow investors to choose different options in term of market capitalisation, sector, theme etc. Thereby, investor can reap benefits of varieties. Under performance of one share is set off by out performance of another share.
Inflation adjusted return
Equity mutual funds have potential to generate better return than traditional investment product like FD, RD as it is linked to market. Wealth creation can happen only when returns are above inflation. Equity mutual funds provide that avenue.
Professional management
mutual funds are managed by a team of professionals lead by a fund manager. The team continuously monitor the performance of the underlying shares in the market. Necessary steps are taken to mitigate risk and also to maintain the desired return as per objective of the scheme. Further, the team is supervised by a committee. Therefore, there is adequate checks and balances in its operation.
Convenience
Investors have options to invest as lumsump, monthly as SIP, transfer from one scheme to another, withdraw and redeem whenever needed. All these can be done from the convenience of home through online. Also investors can do transaction offline through bank branch, Asset Management Company (AMC) branches or through distributors.
There is no limit to investment amount. It can be as low as ₹500.
Tax implications
Investment in equity mutual funds are subject to capital gain tax. If redemption happens within 1 year of investment and there is capital gain then it will attract short term capital gain tax @15%. If redemption happens after 1 year of investment then it will attract long term capital gain @10% if the capital gain is more than ₹1 lakh during the year. The long term capital gain less then ₹1 lakh is tax free.
The dividend paid by AMC is added to the income of the investor for the purpose of tax calculation. Dividend comes under other income and tax rate is applied as per the investors income slab for tax calculation.