Equity Funds are unit trusts systems that invest their assets in the stocks of various firms in accordance with the underlying scheme’s investment goal. These funds are an excellent long-term investing alternative for financial appreciation. Equity funds are a good option for long-term investors who wish to participate in the stock market.

Equity Funds: What Are They?

Investors can choose from a number of equities mutual funds to invest in. The investment aim, risk profile, and investment horizon of the investor should all influence the plan selection. The following are some of the most common types of equity funds.

Funds with a large capitalisation

Large Cap Funds must invest at least 80% of their assets in equity shares of large-cap firms (Top 100 companies in terms of market capitalisation). They invest in well-established businesses with a track record of success. These funds have the ability to provide decent returns while also being less volatile than mid-cap and small-cap funds.

Funds that invest in mid-cap companies

Mid Cap Funds must invest at least 65 percent of their assets in mid-cap businesses’ stock (101-250 companies in terms of market capitalisation). They are more volatile than big size funds, but they have the potential to outperform them in terms of returns.

Funds for large and mid-cap companies

Large and mid-cap funds invest at least 35 percent of their assets in both large and mid-cap firms (the top 100 in terms of market capitalisation) (101-250 companies in terms of market capitalisation). The remaining 30% of the assets can be invested in stocks other than big and mid-cap, as well as debt and money market instruments, and any other securities that SEBI allows.

Small-Cap Mutual Funds

Small Cap Funds must invest a minimum of 65 percent of their assets in small-cap stocks (251 and above companies in terms of market capitalization). These funds have the potential to provide good returns, but they are also more volatile than big cap and mid cap funds.

Funds with a diversified portfolio*

According to market conditions, Multi Cap funds invest in Large Cap, Mid Cap, and Small Cap firms. This allows investors to invest in a portfolio with a diverse range of market capitalizations.

*As of January 1, 2021, Multi Cap funds must invest a minimum of 25% in big size, 25% in mid cap, and 25% in small cap firms, according to SEBI Circular No. SEBI/HO/IMD/DF3/CIR/P/2020/172 dated September 11, 2020.

Why Invest in Equity Mutual Funds – What are the advantages of investing in equity mutual funds?

Diversification

Investors can invest in a diversified portfolio that is exposed to several economic sectors through equity funds. It also permits investments to be made regardless of market capitalisation. When opposed to investing directly in stocks, this minimises risk since the underperformance of certain stocks can be compensated by the outperformance of others.

Returns that are better when adjusted for inflation

Because equity funds are market-linked, they have the potential to deliver superior inflation-adjusted returns than traditional investing routes. Equity funds allow investors to increase their money in a reasonable way over time.

Management by Experts

Equity funds are professionally managed by fund managers who keep a close eye on market investment possibilities while attempting to reduce risk. As a result, equity funds are a fantastic choice for investors looking to obtain exposure to the stock market.

Convenience

Investors can create a SIP (Systematic Investment Plan), SWP (Systematic Withdrawal Plan), or STP (Systematic Transfer Plan), which makes it easier for them to invest, redeem, or transfer their units to another plan.

Benefits from Taxes

Under Section 80C of the Income Tax Act, investments in ELSS (Equity Linked Savings Scheme) are eligible for tax advantages of up to 1,50,000 (for individuals and HUF). It has a three-year lock-in term, which is one of the shortest among tax-saving tools.

Begin with a modest budget.

With as little as INR 500 per month, anybody may begin investing in equities funds using a systematic investment plan (SIP).

Taxation of Equity Mutual Funds*

If the program’s unit are held for much less than a year, the profits are treated as STCG (Short Term Capital Gain) and taxed at 15%; if they are kept for more than a year, the gains are assessed as LTCG (Long Term Capital Gain) and taxed at 10% on gains surpassing one lakh rupees in a financial year.

• In addition, as per the Income Tax Act, there is a surcharge and a health and education cess.

(Note – Due to the unique nature of tax repercussions, investors should contact with their financial adviser or tax specialist before making any investment choice.)

Frequently Asked Questions about Equity Funds