Equity Mutual Funds

Equity mutual funds are the mutual funds which invest the pooled corpus from the investors into a variety of equity stocks. Learn the basics, benefits, categories, and tips to make the most out of your equity mutual funds investment.

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 1. What is Equity?

 2. What are Equity Mutual Funds?

 3. Top Performing Equity Mutual Funds

 4. How Does Equity Funds Work?

 5. Benefits of Investing in Equity Mutual Funds

 6. Types of Equity Mutual Funds

 7. Tips for Investing in Equity Mutual Funds

 8. Methods of Investing-SIP & Lumpsum

 9. Who Should Invest in Equity Mutual Funds?

 10. FAQ on Equity Funds

What is Equity?

In financial terms, assets minus liabilities equals to stockholder’s equity. Breaking it further, shareholder’s equity which is also considered as stockholder’s equity or book value is the “resources of economic value owned by a company” after subtracting “the financial debts or any obligations concerning business operations”. In simple words, equity is the value of shares issued by a company and in the trading world, it is known as stock or ownership. Companies list their shares on the stock exchange which can be bought or sold by the investors. Depending on the deals made at prevailing share prices, the profit/loss can occur as prices are volatile and can fluctuate depending on the growth or fall of the company. Buying low and selling high is the ideal approach to book profit in equities.

What are Equity Mutual Funds?

Equities are volatile and can swing in either way. Equities of companies with growth potential are more likely to grow higher and faster but a wrong choice can be hazardous, hence choosing the right equity stock is of vital importance to reduce the risk. It can be difficult to predict the behaviour of stock for laymen but, an experienced and professional fund manager can do it in a much reasonable manner, increasing the chances of growth. The chances of better returns further increase if the funds are invested in multiple stocks.

Equity Fund is an opportunity to grab the lucrative returns of equities where a professional manager handles your investment. The investments of the mutual fund are handled by a fund manager who is a professional in stock-picking and equity investments. He/She invests in a large number of stocks in a style which is in line with the objective of the fund. A variety of mutual funds are available in India and the investor is free to choose the most suitable mutual fund for oneself. Equity funds are the highest return generating mutual funds category but also possesses a high risk.

How Does Equity Funds Work?

In equity mutual funds, the pooled corpus is invested in stocks and the profit or loss is divided among the investors. In technical terms, the assets under management of an equity mutual fund are divided into units which are bought or sold by the investors at a different price or Net Asset Value (NAV). The AUM is used to buy the equity stocks selected by the fund manager. Investment or withdrawal in mutual funds is nothing but buying and selling of units at prevailing NAV.

Suppose an equity fund has 100 units and AUM of Rs 1000 accumulated from 10 investors who invested Rs 100 each in the fund. As the initial NAV is Rs 10, every investor will own 10 units. Now if the stocks chosen by the fund manager, perform well and the assets under management grow to 1200, the NAV of the fund increases to Rs 12 and each investor will gain 20% returns. For every new investment, new units are bought at prevailing NAV and are sold when redemption is made.

Benefits of Investing in Equity Mutual Funds

The equity mutual funds can allow an investor to seize multiple benefits regarding investments. By investing in a suitable equity scheme, the investor can get following benefits apart from the long term capital appreciation:

  • Professional Management : Equity funds are managed by professional fund managers who have a plenty of experience in the equity market. They are backed up by the research team who actively explore every aspect of the stocks before including it in the portfolio. Hence, the stocks selected by the fund managers are more likely to perform better than others.
  • Diversification :If all the funds are spent on stocks of a single company, there are more chances of losses. But if the same funds are invested in a variety of stocks the probability of gain increases and the risk associated with investments also reduces. Equity mutual funds have a large number of stocks in the portfolio with growth potential due to which investor is much likely to gain higher returns.
  • Goal Oriented Investing : Investments in the equities can be harmful if no particular goals are set up before investing. A variety of equity funds in India aim for different goals and hence investor can freely choose the fund which suits his/her financial goals.
  • Convenience : The investment can be done with a small amount of as low as Rs 500 and every type of investor can get the benefits of equities through equity mutual fund. The Systematic Investment Plan (SIP) allows investors to slowly gather enormous wealth in the long term through the power of compounding and rupee cost averaging. It also goes easy on the pocket and doesn’t embark financial imbalances.
  • Tax Benefit : The ELSS category of equity mutual funds allow efficient tax saving through equity investments. It has a lock-in period of 3 years and allows tax saving under section 80C. This is the most beneficial tax saving tool as it allows investors to gain high returns in long term.
  • Liquidity : The equity mutual funds’ units can be bought or sold anytime on a working day. For the request made on the non-working day, the transaction is processed on the next working day. The exit load is charged if redemption is done within a year but later on all the units can be redeemed anytime without any extra charges.

Types of Equity Mutual Funds

Based on the types of stocks included in the portfolio and investment strategy, equity funds are divided into various categories.

1. Large Cap Fund :
These are the equity mutual funds which invest the majority of the corpus in the companies which are ranked 1st to 100th in terms of market capitalisation. The top hundred industries are well established in the country and have strong financial stability and can withstand smaller fluctuations in the market. They possess a lower risk than other equity funds but have decent growth opportunities. It can be chosen by investors seeking capital appreciation in the tenure of 5 years and more.

2. Mid Cap Fund :
Mid Cap mutual funds invest in the equity instruments of the companies which are listed from 101st to 250th in terms of market capitalisation. These funds have a decent experience of the market conditions and also have an opportunity to grow further. Hence, mid-cap mutual funds possess slightly higher risk than the large-caps but lesser than the small-caps while having good opportunities for growth. It is suitable for the investment of 7 years and more.

3. Small Cap Fund :
It is one of the most aggressive categories of equity mutual funds because the stocks chosen under this category is of companies which are listed after 251st rank in terms of market capitalisation. These are the emerging companies and have a plethora of opportunities to grow and become leaders of tomorrow. The fund is suitable for the investments of more than 7 years and the investors must be ready to handle the high risk.

4. Multi-Cap Fund :
These funds have a mixed portfolio which includes large cap, mid cap and small cap stocks. These funds provide a balance of risk and returns. These are also known as diversified equity fund. The fund managers in this category have a wider margin of stocks to choose from and can shift the allocation towards most appropriate stocks to achieve the objective.

5. ELSS :
These are the tax saving mutual funds which invest in the equity instruments to deliver long term capital gains. These funds allow investors to reduce the taxable income by up to Rs 1,50,000 per financial year by investing that amount in an ELSS Fund. It has a lock-in period of 3 years which is lowest as compared to any other tax saving tools under section 80C. These funds aim for the tax deduction and long term capital appreciation.

6. Index Fund :
Index funds are passively managed funds in which the portfolio includes all the stocks of an index. These are used to diversify the equity investments throughout the index to grab the overall growth and normalise the associated risk of equities.

7. Thematic Fund :
Thematic mutual funds invest in the stocks of companies which are based on a particular theme. The theme can be of international exposure, rural India, MNC, energy, PSU etc. A theme may comprise of multiple sectors which have the same flavour. These funds are most suitable for experienced investors.

8. Sectoral Fund :
Sectoral mutual funds are the equity funds which can only invest in the companies which belongs to a particular sector. These funds are considered risky and are suitable for experienced investors as these funds can provide exponential gains or losses depending on the market condition as generally, most of the stocks associated with a particular sector tends to follow similar trends.

9. Value/Contra Fund :
The value-oriented funds or contrarian funds are the mutual funds which bet on the under-performing stocks which are available at cheaper prices. These funds are risky but the right value/contra fund can give significant returns in long term. Investors with a high-risk appetite can choose these schemes for long term gains.

10. Large and Mid Cap Fund :
This category of the equity mutual fund uses stocks of top 250 companies listed in the Indian stock market. It is a combination of the large-cap and mid-cap mutual fund. These funds invest in equity instruments of large-cap and mid-cap companies. The large-caps are stable and less risky while the mid-caps are risky but have better opportunities for growth. The combination allows investors to gain high returns in long term with a moderate to high-risk factor.

11. Focused Funds :
As per the norms of SEBI, a focused fund can only invest in a particular number of stocks belonging to a particular number of sectors. The number of companies ranges between 20-30. These funds limit the diversity in the portfolio as over-diversifying the portfolio can reduce the returns.

Tips for Investing in Equity Mutual Funds

Based on the types of stocks included in the portfolio and investment strategy, equity funds are divided into various categories.

1. Know Your Investment Objective :
Investment in equity mutual funds must be done to achieve a certain goal. Investment objective can be wealth creation, retirement planning, buying an asset, etc. The tenure to achieve the goal must be kept constant and the fund selection should be done accordingly.

2. Know Your Risk Appetite :
Investors of equity mutual funds must know their risk tolerance level. A variety of equity funds are available in India with a different risk factor. An investor must choose the one which possesses the risk that is in line with the investment objective and risk tolerance level.

3. Maintain Discipline :
Discipline is the key to being a successful investor in equity mutual funds. Decisions made in a panic must be avoided. SIP investment must be continued until the objective is reached. By not investing during the bear market, investor might miss the opportunity to buy more units at a cheaper price.

4. Stay Updated :
Equity mutual funds are subject to market risk and investors must keep a track of the market trends and updates. It is not essential for a SIP but better decisions can be made with the help of market trends. If a market is falling, additional purchases can be made on SIP to maximise the output.

5. Regular Monitoring :
Equity mutual fund investors must check their investments at regular intervals and make a decision to refurbish the portfolio or SIP amount if needed. If the portfolio is constantly facing loss, assistance from an expert can be taken to alter the investments.

6. Diversify your Investments :
Don’t put all your eggs in one basket. Instead of investing all your money in one fund, it is better to spread the investment amount over a number of schemes. The chances of loss get reduced and the diversification allows consistent growth.

7. Don’t Focus on NAV :
NAV decides how many units will be assigned to the investor. Higher NAV does not mean a better fund or lower NAV does not mean the growth will be faster. The growth of NAV must be checked by percentage rise or fall. 1 unit of a fund with NAV of Rs 1000 is equal to 100 units of a different fund with NAV Rs 10.

8. Selection of Scheme is the Most Important Part :
The selection of a mutual fund must be done after considering every aspect of a fund including volatility, the risk to reward ratio, experience and strategy of the fund manager, portfolio structure, investment style, stock selection style and past performance under different market conditions. The past performance must not be only factor to consider as it is not mandatory that a fund will repeat what it has done in past, but it can surely give an idea of the ability of the fund.

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Methods of Investing - SIP & Lumpsum

For a convenient investment and wealth gain experience, equity mutual funds allow investments through SIP and lumpsum. The Systematic Investment Plan (SIP) allow investors to slowly gather enormous wealth in the long term through the power of compounding and rupee cost averaging while lumpsum is a one-time investment in a mutual fund at prevailing NAV. As equity schemes possess frequent fluctuations, investment through lumpsum can be risky. SIP assigns units to the investor periodically at different rates hence the risk gets reduced without embarking a financial burden on the investor.

Who Should Invest in Equity Mutual Funds?

Equity mutual funds are subject to market risk. Under the bearish phase of the equity market, the returns can be negative and every equity mutual fund investor must be prepared for that as nothing is certain in equities. Equity mutual fund can be volatile but in the long term, say for more than 5 years, negative returns cannot be seen. Majority of the equity mutual funds aim to produce long term gains and must not be chosen for short term investment or trading.

FAQ on Equity Funds

1. What time is best for investment in equity mutual funds?
Buying low and selling high is the key, however timing the market must be avoided as the equity market is uncertain and no one can guarantee what is going to happen next. Mutual funds aim to achieve the long term goal and are not about timing the market but how much time you spend in the market. SIP investments must be continued regardless of the market conditions but additional purchases can be made when the market is falling.

2. What is the process to invest online in equity mutual funds?
Investors need to complete their profile at MF Planner and can start investing after completing the KYC.

3. What is an Asset Management Company?
An Asset Management Company (AMC) is a company that provide and manage mutual funds and invests the pooled funds into appropriate instruments. HDFC Mutual Fund, ICICI Prudential Mutual Fund, Reliance Mutual Fund, Aditya Birla Sun Life Mutual Fund etc are the largest AMCs in India.

4. How often is NAV declared?
NAV is declared on every working day. It is declared before 9 PM in the evening.

5. What is a Switch?
Switching is a process to transfer investments from one scheme to another. For the switching process, both the schemes should be of same AMC. Switching is not allowed from one AMC to another.

6. How are returns on equity mutual funds taxed?
If equity investments are redeemed within 1 year of investment, 15% of the returns will be taxed under Short Term Capital Gain (STCG) tax. If the units are redeemed after 1 year of investment, returns of more than 1 lakh will be taxed at 10% and are known as Long Term Capital Gain Tax (LTCG).

7. What are the documents required to start investing?
A resident investor needs a valid ID proof, address proof, recent photographs and PAN to start investing. NRIs also need a passport, bank statement, and residence proof outside India to start investing in mutual funds in India.

8. How can I get the help of an expert regarding mutual fund investment?
Experienced and professional financial experts can be reached through MF Planner regarding any query or assistance regarding regular mutual funds.

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