Equity Mutual Funds – Types, Benefits, Taxation

Many people think of investing in Mutual Funds, but choosing the right form can be difficult. Here we will explore different types of Mutual Funds and their benefits. There are a lot of options available, so we’ll talk about Equity Mutual Funds and their different types. We’ll also learn more about equity funds and find out why they’re good investments.

What Are Equity Funds

With Equity funds, the fund manager can spread their investments across companies of different stocks, sectors, or market caps. The equity funds are largely tied to risk since the performance depends on various market conditions. They offer a better return than term deposits and debt-based funds, but there is risk because their performance depends on various market conditions.

Types of Equity Mutual Funds?

Equity mutual funds are categorized in multiple ways as mentioned in below.

Categorization based on Market Capitalization

Large Cap Fund – At least 80% of large cap fund’s capital is invested in large companies. This makes the fund’s investments more stable than other funds that invest in more volatile small and mid-cap companies.

Mid-Cap Fund – These funds invest around 65% of their total assets in equity shares of mid-cap companies (101-250th ranked on the market cap rankings) tend to offer better returns than those who invest in large-cap companies, even though they are more volatile.

Small-Cap Funds – These funds typically invest 65% of their total assets in equity shares of small-cap companies. This is a huge list and more than 95% of all companies in India fall into this category. These schemes are a great way to make money but usually carry a higher risk market than those with large-cap and mid-cap shares.

Multi-Cap Funds – In these funds, 65% of the assets are invested in stocks from large, mid-cap and small companies. The fund manager keeps shifting their investments to follow the market trends as well as to stay with the scheme’s objectives.

Large and Mid-Cap Funds – These funds provide a low-risk, high-reward portfolio which is invested in mid-cap stocks with 35% of the fund and in large-caps with 35%.

Investment Strategy-based Categorization

Focused Equity Fund – This investment company invests in 30 stocks, with a maximum of those worth specified.

Theme and Sectoral Funds – These equity mutual funds follow a specific investment theme like international stocks, while others may prefer to invest on a sector basis. The risk level is higher when you invest in a theme or sector with your fund since they concentrate on only one part of the investment market.

Contra Equity Funds – These investment schemes invest in stocks that are under-performing in the market and take on a contrarian strategy by purchasing them at a low price and assuming they will recover.

Investment type Based Categorization

Active funds – These are actively managed by fund managers who handpick stocks to invest in.

Passive funds – These don’t require any input from the fund manager. These funds track a market index or segment and will invest in the available stocks in that group.

Read More: What Is The Difference Between Direct And Regular Mutual Fund

Tax-Saving Based Categorization

Equity Linked Savings Scheme (ELSS) – ELSS funds offer tax benefits and provide a lock-in period of 3 years. At least 80% of the fund’s assets are invested in equity or equity related instruments.

Non-Tax Saving Equity Funds – All investments except ELSS are classified as “non-tax saving” because the returns on these investments are subject to capital gains tax.

How Equity Mutual Fund works?

A Mutual Fund scheme is classified as an Equity Mutual Fund if it invests more than 60% (sixty percent) of its total assets in the equity shares of different companies. The fund manager chooses from either growth-oriented or value-oriented stocks depending on which investment generates the most returns.

Benefits of Equity Mutual Funds

You don’t have to know anything about the market and you can still invest your money in Equity Funds. Traditionally, only the experts who are good at investing could make a lot of money on the equity market. But now expert fund managers research for investors and there are many advantages:

  • It offers flexibility and liquidity
  • You can opt for systematic investments (installments)
  • Convenient
  • It offers diversification
  • It is cost-efficient
  • Your investment is managed by experts

How should you invest in an Equity Mutual Fund?

Investors must carefully assess their financial goals, risk tolerance, and investment horizon before signing the dotted line. We have divided the investors into two broad categories – new entrants and seasoned investors.

New Investors –

Equity mutual funds are a wonderful investment for those who lack the time to monitor their investments, or can’t afford to invest large amounts of capital into them. We recommend most new investors opt for Large-Cap Equity Funds, as these typically invest in the top performing companies and have a proven track record of generating consistent returns.

Seasoned Investor –

When it comes to choosing the right equity funds, you should be diversified and take calculated risks. Your understanding of the market can help you chose a better option.

Here you can find list of Equity Mutual Fund – Moneycontrol’s Top Equity Mutual Funds

Should You Chose Lumpsum or SIP?

When choosing how to invest, there are many options. One is whether to make one lump sum or a regular deposit each month.

Investment can be lump sum or through an SIP. A lump sum is calculated by the number of units multiplied by the price of each unit. An SIP investment is calculated by dividing the total amount to be invested by the total number of intervals over which it will be invested.

Lumpsum investing has its benefits, but SIP investing is often a better choice. Lumpsum investors need to make sure they invest at the right time and that they’ve made good choices, as they have more risk than those who invest in SIPs. SIP investing helps reduce this risk by making investors use fixed amounts on a smaller timeline. They benefit without having to be concerned about market fluctuations, as well as experiencing Rupee Cost Averaging.

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How Equity Mutual Funds Are Taxed?

Capital Gains Tax

If you are in possession of a scheme for up to one year, your gains from the sale of those schemes are considered short-term capital gains or STCG. Short term capital gains are taxed at 15%.

If you hold a scheme for more than one year, your gains from the sale of that scheme are considered long term capital gains LTCG. Earnings above Rs.1 lakh without indexation benefits are taxed at 10%.

Dividend Distribution Tax (DDT)

The dividend distribution tax of 10% is collected at the source. This means that when a mutual fund pays out dividends, it collects 10% DDT before distributing the dividend to shareholders.

Read More: What Is Balance Sheet In Accounting? A Complete Guide

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