What Is An Equity Mutual Fund?
Equity funds are a type of mutual fund that invests at least 65% of its corpus in equity shares of various companies. The stocks are picked by a group of experts who try to get you the most money out of your investments while keeping the risk in check. The risk of investing in equity funds is higher than the risk of investing in other types of mutual funds. Also, “one size does not fit all” when it comes to equity funds. There are many different kinds of equity funds, each with a different investment goal that needs to match your risk profile.
How Does Equity Mutual Fund Work?
Equity mutual funds invest in equity shares (stocks) of various companies. Consequently, by investing in an equity mutual fund, an investor indirectly becomes an owner of the company in which the fund has invested and therefore gains if the shares of companies in which the mutual fund has invested cumulatively do well.
- Equity Mutual Fund investment goals and strategies depend primarily on their category. Under SEBI regulations, Equity Mutual Funds are categorized based on either their investment style or the market-cap of their investee companies, they must adhere to the SEBI-defined nomenclature rules when naming the fund, so that the investors have visibility in respect of the destination where their money is being invested. For instance, large-cap funds must invest at least 80% of their capital in the top 100 companies in India based on market capitalization (these companies are called large-cap companies). Mid Cap Funds are required to invest at least 65 percent of their total assets in India’s mid-sized businesses, for example, SBI Mid-Cap Fund.
- Investment decisions in relation to a fund’s corpus are taken by the fund manager, and his team. These are experts in the financial and market sectors. They research and analyze a variety of technical and fundamental factors, such as a company’s profitability, its ability to withstand difficult economic periods, its industry, etc. And based on this study, they make financial decisions regarding which stocks to purchase, at what price to purchase and sell, how many to purchase, etc.
- In addition, after purchasing these stocks, the fund management regularly monitors the performance of the firms, the sectors in which they operate, the economy, and other factors that can influence the values of these stocks. If they believe that some of the companies whose shares they purchased will underperform, they remove them from their portfolio. Similarly, if they see promising enterprises at an early stage, they will invest in them. As a result of their continuous monitoring of financial markets and the economy, these fund managers are in a better position to make such tactical decisions, obtain the most from equity markets, and handle volatility more effectively.
How Do Equity Mutual Funds Earn?
Equity funds generate profits in two ways:
- One, by purchasing shares of a company at a discount and selling them at a profit. As previously said, the fund manager continuously monitors the market and determines which stocks to sell and where to invest. Therefore, if a stock’s price has increased significantly and the fund manager decides it is appropriate to sell, he will. Capital Gains refer to the profit realized by selling an asset at a greater price than at which it was originally purchased. The fund manager then determines where to reinvest these profits so that the capital continues to grow. Here is where compounding comes into play. You get returns on the profits your investments generate.
- Dividends distributed by firms constitute the second source of returns for mutual funds. Since a mutual fund owns a portion of the company, if the business performs well, the fund receives dividends representing its portion of the earnings. The fund manager determines how to reinvest dividends.
Top 10 Performing Equity Large Cap Mutual Funds (as per 5-Year Return)
|1. Canara Robeco Bluechip Equity Fund||14.25%||7,314.35|
|2. Axis Bluechip Fund||13.80%||34,106.21|
|3. Kotak Bluechip Fund||12.28%||4,537.26|
|4. Mirae Asset Large Cap Fund||12.28%||31,760.41|
|5. Edelweiss Large Cap Fund||12.26%||329.35|
|6. Sundaram Large Cap Fund||12.08%||2,966.57|
|7. UTI Mastershare Fund||12.06%||9,815.46|
|8. ICICI Prudential Bluechip Fund||11.95%||31,522.90|
|9. Invesco India Largecap Fund||11.85%||663.13|
|10. Baroda BNP Paribas Large Cap Fund||11.72%||1,285.89|
Source: AMFI (data as on 20/07/2022)
Taxation on Mutual Funds
- In the case of capital gains, taxation will depend on the length of time an investor keeps the units of a mutual fund. If the holding term is less than 12 months, there will be a 15 percent tax on Short-Term Capital Gains (STCG). For instance, if the Short-Term Capital Gain is 1 lakh rupees, the investor must pay 15,000 rupees in STCG tax.
- If the holding period exceeds 12 months, the gains are subject to a 10% long-term capital gains (LTCG) tax on gains over 1 lakh. For instance, if the LTCG is 1.5 lakh, the taxable amount is 50,000, and the LTCG tax is 5,000 (10% of 50,000). However, if the LTCG is 90,000, then there is no taxable amount.
- Tax Saving Funds: If you invest in top ELSS (Equity Linked Saving Scheme) Funds such as Axis Long Term Equity Fund Direct-Growth, you are eligible for a tax rebate of up to Rs. 1,50,000 a year covered under section 80C of the Income-tax Act, 1961. You can find investment options related to ELSS funds.
How To Invest in Equity Mutual Funds?
Using the following steps, you can start your investment journey by
- Sign up for an account at Kuvera.in.
- Register your KYC.
- Start investing.