Equity Mutual Funds: What are Equity Funds? Types and Benefits

Mutual Funds invest in various asset classes as per the scheme mandate. We can categorise mutual funds based on the assets they invest in such as Equity- oriented Funds, Debt-oriented Funds, Commodities, Indexes etc. Let’s take a detailed look at equity funds.An equity fund is a mutual fund scheme that invests most of its assets in equity stocks listed on the exchange. In the Indian markets, SEBI categorises mutual funds investing at least 65% of their assets in equity stocks in various proportions. The remaining assets can be invested in other assets like debt, gold, or even cash. According to Kfin tech, as of September 30, 2022, 80% of Individual investors AUM was invested In equity oriented mutual funds, up from 57% in March 2016

An equity mutual fund predominantly invests a majority of its fund in equity or equity-related assets. While the fund can invest in specific companies based on their market cap, sector, or valuation, the core of each fund remains the same i.e., investing in equity and equity-related instruments. Equity funds can be actively managed funds as well as passive funds that track a particular equity index like Nifty 50 . Equity funds can also be tax-saving instruments (ELSS).After investing a majority of the funds in equity or equity-related instruments, such funds can have exposure to debt assets, commodities like gold, or even hold cash or cash equivalent assets. The decision about the asset exposure and the proportion depends on the fund manager if the fund is actively managed, and if it is passively managed then it will depend on the benchmark index.

Equity investments tend to offer higher returns in the long run as compared to other assets like debt or real estate. Hence, investors investing in equity tend to grow their wealth faster. But equity investing involves a lot of risks too and it requires good analytical and fundamental knowledge to identify good businesses to invest in.Hence, equity funds offer a good solution to those investors who don’t have the required skills or the time to identify investment opportunities. Equity funds offer professional fund managers who do the job for investors and identify good businesses and manage the funds for them. Also, investors who don’t have a big amount to invest and want to diversify their funds across stocks prefer equity funds as they are low-ticket investment vehicles.Equity funds pool money from various investors who share similar objectives and invest their money in various businesses across industries in different proportions for them. Investors who invest in equity funds get units against their investment based on the NAV at the time of their investment. Such NAV grows with the growth in the market value of the fund’s assets and also leads to the growth of investors’ money.For these reasons, investors prefer equity funds as their vehicle for investment in equities.

Equity mutual funds are typically categorised based on the market cap of the companies that they primarily invest in. Let’s take a look at some of the common types of equity funds.

1) Large Cap Funds

Such funds invest a majority of their equity portfolio into large-cap companies. Such funds are also called blue-chip funds as large-cap companies are called blue chips. By investing in large-cap companies, large-cap funds aim to generate stable returns for their investors with relatively low volatility. Such funds are risky when compared to debt mutual funds but less risky when compared to mid-cap or small-cap mutual funds.

2) Mid Cap Funds

Mid-cap funds predominantly invest in companies that are categorised as mid-cap companies. Such funds are riskier than large-cap funds but are less risky than small-cap funds.

3) Small Cap Funds

Such funds invest in stocks of small-cap companies. As such companies are small, they have great growth potential and hence also a potential to deliver multifold returns. However, only a few companies make it big and deliver great returns to their investors and as a result, investing in small-cap companies is highly risky. Small-cap funds aim to provide their investors with high returns by investing in such companies.

4) Flexi Cap or Multi Cap Funds

Investors who want to diversify their investment in companies across market caps can invest in Flexi-cap or Multi-cap funds. Such funds diversify and invest in good companies regardless of the size of their market cap. They aim to give the investor a benefit to invest in companies across market cap without limiting them to a specific sector or specific group of companies. They are like Hybrid Mutual Funds but for equities. Some flexi-cap funds even invest in international equity to further diversify their portfolio.

5) Equity Linked Saving Scheme (ELSS) Funds

ELSS Funds are gaining popularity recently as a preferred tax saving option under 80C. ELSS funds invest at least 80% of their funds in equity or equity-related assets plus the investments in ELSS funds are also eligible for deductions under 80C up to Rs. 1,50,000. Funds invested in ELSS funds get compulsorily locked in for 3 years from the date of the investment. This 3-year lock-in is also lower than other tax-saving products that have higher lock-in periods. As a result, ELSS funds are getting popular as they offer exposure to equity with tax-saving options.

6) Sector-Specific Funds or Thematic Funds

Thematic Funds invest in companies from a specific sector to participate in the growth of that sector in the coming years. The fund chooses a sector like Banking & Financial Services, IT, Pharma, PSUs, etc. and invests in companies that are expected to perform in the coming years as the sector also grows. Such funds can give their investors high returns if the sector sees good growth in the coming years but investing in a single sector can also backfire as the analysis can go wrong and hence such funds are highly risky.Also Read: What Are Debt Funds?

1) Management by experts

Mutual Funds are managed by professionals who are experts in their respective fields. Equity investing is risky and requires good eyes to identify good businesses that can generate profits. Mutual Funds are managed by a team who analyses and researches various opportunities for investment and investment decisions are taken by fund managers who are experienced and experts in their field.

Equity Funds help investors diversify their investment across companies and sectors in various proportions. Such diversification is not possible if an investor doesn’t have a large amount. Equity mutual funds offer them diversification at a low ticket.

3) Convenient for Passive Investors

Equity Funds are an ideal investment vehicle for investors who don’t have the time to analyse and identify investment opportunities. The fund manager does the job for them while they can relax knowing that their money is in responsible hands. Passive equity funds take a step even further by giving investors an opportunity to invest in an index by closely replicating the index.

4) Systematic Investment Plan (SIP)

Mutual Funds offer investors a way to invest proportions of amounts regularly via SIP. Investors who save small amounts regularly and want to invest them in equity assets can do it via Equity Mutual Funds. This way they can participate in equity assets by investing in them regularly. Investors can start their equity fund SIP from as low as Rs. 100.

The tax implication on equity funds is similar to that of Equities listed on the stock exchange as per the Income Tax Act. If a fund is categorised as an equity fund, the taxability on gains made from such investments will be similar to the taxability on equity assets.Short Term Capital Gains (STCG) made on investments from equity funds will be taxed at a flat rate of 15%. While Long Term Capital Gains (LTCG) are exempted up to Rs. 1 Lakh (includes LTCG from all equity investment) and for LTCG above the exempted limit, a flat rate of 10% will be levied.

Investors who invest in ELSS funds are eligible to claim a deduction on their investment amount up to Rs. 1.5 Lakh under Section 80C of the IT Act. However, gains made from ELSS funds are still taxable. As investments under ELSS funds are locked in for 3 years, the gains classify as LTCG and will be taxed as per LTCG rates.

Equity Funds are the perfect solution for investors who want to invest in equities with a low investment. They offer an ideal investment solution to investors who want to take a little higher risk and want to stay invested with a long horizon. Equity funds are surely volatile, but it also gives an investor the chance to earn higher returns as compared to other assets like debt, gold, or real estate. So, now that you know what equity funds are and how they function, it’s time to start investing in them!

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.