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Last Updated : Nov 11, 2019 02:53 PM IST | Source:

Equity fund: Equity mutual fund types, features and benefits

Equity Fund: Equity mutual fund is one of the types of mutual fund scheme that is popular with investors. Learn all about equity fund, including its types, features and the key benefits of investing in equity funds.

Representative image
Representative image

A mutual fund is a popular investment option as it provides access to a broad portfolio of assets. Some of the mutual funds also offer higher returns than the ones from conventional investments. A mutual fund is professionally managed by a fund manager who takes all the decisions in line with the financial goals of the investor. One of the types of mutual fund schemes that are popular with investors is an equity fund. The objective of these schemes is to provide capital appreciation over a medium to the long- term investment horizon. As per the regulations of SEBI, an equity mutual fund scheme should invest at least 65 percent of the scheme’s assets in equities and equity-related instruments. As the investment is made in equity products, these funds are comparatively high risk. This scheme is suited for investors who have a good risk appetite and are looking for capital appreciation over a long term investment horizon.


How do equity funds work?

Equity funds invest at least 60 percent of their assets in equity shares of companies in varying proportions. This is done in accordance with the investment objective of the fund. The balance amount is invested in debt and money market instruments to provide a corpus for redemption requests and reduce the risk.

Investors have different options to choose from, such as dividend option, growth, etc and the investment can be either value-oriented or growth-oriented. The investor is free to make a decision depending on their preferences. These schemes are best for investors who have a long-term outlook and seek appreciation over a period of time.


The returns from this scheme depending on the performance of these equities. Investors usually aim for a more diversified portfolio that reduces the negative effect of an individual stock's adverse price movement on the overall portfolio and on the share price of the equity fund. The price of the equity fund is determined on the basis of the fund's net asset value (NAV) less than its liabilities. Equity oriented mutual fund is managed by portfolio managers.


Benefits of equity funds

Here are the key benefits of investing in equity funds:

Diversification: Your portfolio can have a diverse range of equity from different sectors. You don’t have to research any of these equities or know about the financial status of these companies as the fund manager takes care of that.

Regulated: SEBI regulates all aspects of these mutual funds. Every fund house needs to disclose its month-end portfolios on their website along with NAVs and periodic expense ratios. This information is also available with investment advisory platforms that provide performance and portfolio analysis of mutual funds. This allows investors to take informed investment decisions.

Systematic Investments: Most of the equity-oriented mutual funds allow the investment to be made through a lump sum investment amount or through a systematic investment plan (SIPs). SIPs ensure that you stick to your investment discipline by investing a fixed amount every month.

Great for first-time investors: Investment in these funds is a top choice of budding investors who do not have much knowledge about the mutual funds market. While there is a certain amount of risk associated with any equity investment, investing in a large-cap or mid-cap will usually deliver high returns.

Professionally managed: The investments made are managed by a fund manager who has the experience and knowledge of how the market functions. The fund manager takes decisions to buy or sell a particular stock and meet the investment objective of the investors.

Features of equity funds

No minimum investment amount: If your target is to build a diversified investment portfolio, equity fund is a good way to start. You can start with as little as Rs 500 through a SIP.

Convenience: Investing in mutual funds is more convenient than purchasing various shares. You just need to invest in one of your chosen equity funds to own a portfolio while trading numerous times to purchase personal shares and generate a comparable portfolio. It would be impossible to buy so many stocks separately and monitor the performance of each of those stocks. Furthermore, unlike inventory transfers, a Demat account, and a broker account are not a compulsory necessity for mutual funds.

Tax Efficiency: Equity funds are also tax efficient. Their fund house does not incur any capital gains tax each time a fund manager buys or sells a unit. Capital gains tax is only paid by the investor at an individual level.

Well Regulated: All mutual funds are very closely regulated by the Securities and Exchange Board of India (SEBI). All funds have to disclose their month-end portfolios on their website and publish daily NAVs (Net Asset Value) and periodic expense ratios as mandated by SEBI.


Types of equity funds

There are various types of equity mutual fund schemes which are differentiated on the basis of underlying portfolio and levels of market risk. The common types of equity mutual funds on the basis of market capitalisation are:

Large-cap Equity Funds: These funds invest at least 80 percent of its assets in the shares of large-cap companies that fall within the top 100 companies in terms of total market capitalization. These schemes offer stable returns over a period of time. However, the quantum of return is lower compared to the small-cap and mid-cap equity funds.

Mid-Cap Equity Funds: These funds invest at least 65 percent of its total assets in mid-cap stocks i.e. stocks which rank from 101st to 250th position in terms of total market capitalisation. It is a riskier fund than large-cap stocks but less risky than small-cap stocks. The fund provides relatively higher returns when compared to large-cap equity funds.

Small-Cap Funds: These invest in stocks of smaller-sized companies (stocks of companies with 251st and below ranking in terms of market capitalisation). Small-cap funds are riskier and more volatile as the investment is in young companies that have growth potential.

Multi-Cap Equity Funds or Diversified Equity Funds: These invest at least 65 percent of its assets across the large-cap, mid-cap, and small-cap stocks and other equity-related instruments. Due to this, an investor is exposed to a diversified portfolio spread across sectors and market capitalisation. Diversification helps to reduce the risk as the returns from the investment are not linked to the performance of one stock alone. If you are looking for higher returns, this is a good option.


Who should invest in equity funds?

The decision to invest in any mutual fund depends on a number of factors such as risk tolerance, investment horizon, and goals. In particular, equity funds are great for new investors who just want to get a taste of the investment market. However, considering the volatile nature of the funds, such investors should proceed with caution. Equity funds are a great option for experienced and savvy investors who have a considerable risk appetite and a long-term investment horizon.


How are equity funds taxed?

There are two aspects of the taxation of an equity-oriented mutual fund: dividends and capital gains. Dividend refers to the return generated by a particular fund. A capital gain is a difference between the value at which an investor purchased the units of a mutual fund scheme and the value at which the units were sold or redeemed. There are two types of capital gains tax as per the investment tenure: long term capital gains and short-term capital gains.

At present, Dividend Distribution Tax (DDT) at 10 percent is paid on all the dividends from equity mutual funds. The investor's in-hand receipt of the dividend is reduced by the extent of DDT.

The holding period of mutual fund units can either be short-term or long-term. In the case of equity mutual funds, a holding period of 12 months or more is regarded as long-term. So, long-term capital gains tax or LTCG applies to those investments. The present rate of LTCG tax is 10 percent.

Equity funds are regarded as short-term investments if the holding period is less than 12 months. In such a case, short term capital gains tax or STCG is applicable. The present rate of STCG tax is 15 percent.

A Securities Transaction Tax (STT) of 0.001 percent has to be paid on equity-oriented mutual funds at the time of redemption of units. The STT is not paid separately as it is deducted from the mutual fund returns.

Equity Linked Saving Scheme, which is an equity-oriented fund, is the only pure equity investment that offers tax benefits up to Rs 1.5 lakh in a financial year under Section 80C of the Income Tax Act, 1961. ELSS which provides long term capital gains above Rs 1 lakh is taxed at 10 percent. LTCG over Rs 1 lakh is taxable at the rate of 10 percent without the benefit of indexation. Additionally, the mutual fund has to pay a dividend distribution tax of 10 percent on dividends declared under ELSS resulting in a reduced dividend.




What is the difference between the NAV of a mutual fund and share price?

The share price represents the value of equity of a company as quoted on the stock exchange. The demand-supply and company’s projected performance has a bearing on the share price. This is why the market value and book value of shares matter. Book value represents the value of the company according to its balance sheet. On the other hand, market value is the value of a stock or a bond, based on the traded prices in the financial markets. That's why the stock market price of a share is different from its book value. However, in the case of a mutual fund, there is no market value for the mutual fund unit. Therefore, if the units of a mutual fund are purchased at its NAV, it is similar to purchasing it at its book value.


Does SEBI permit cash investments in mutual funds in India?

Yes, cash investments up to Rs 50,000 per investor, per mutual fund, per financial year can be made in mutual funds. However, any repayment (redemption/dividend) is made only through the bank channel.


Can non-resident Indians (NRIs) invest in mutual funds?

Yes, non-resident Indians can also invest in mutual funds. Necessary details in this respect are given in the offer documents of the schemes.


What is the ideal proportion between debt and equity-oriented schemes?

An investor needs to take into account his risk-taking capacity, age factor, financial position, etc. As already mentioned, the schemes invest in different types of securities as disclosed in the offer documents and offer different returns and risks. Investors may also consult financial experts before taking decisions.


Do investors receive a certificate or statement of account after investing in a mutual fund?

Mutual fund houses are required to despatch certificates or statements of accounts within five working days from the date of closure of the initial subscription of the scheme. If you have invested in a close-ended scheme, the investors would get either a Demat account statement or unit certificates as these are traded in the stock exchanges. In case of open-ended schemes, a statement of account is issued by the mutual fund within five working days from the date of closure of the initial public offer of the scheme and/or from the date of receipt of the request from the unitholders. The procedure of repurchase is mentioned in the offer document. Separately, AMCs are required to send confirmation specifying the number of units allotted to the applicant by way of email and/or SMS's to the applicants registered email address and/or mobile number as soon as possible but not later than five working days from the date of closure of the initial subscription list and/or from the date of receipt of the request from the unitholders.


How to choose a scheme for investment from a number of schemes available?

As already mentioned, the investors must read the offer document of the mutual fund scheme very carefully. They may also look into the past track record of the performance of the scheme or other schemes of the same mutual fund. They may also compare the performance with other schemes having similar investment objectives. Though past performance of a scheme is not an indicator of its future performance and good performance i, this is one of the important factors for making an investment decision.

In case of debt oriented schemes, apart from looking into past returns, the investors should also see the quality of debt instruments which is reflected in their rating. Similarly, in equities schemes also, investors may look for the quality of the portfolio. They may also seek advice from experts.


Are the companies having names like mutual benefit the same as mutual funds schemes?

Investors should not assume some companies having the name “mutual benefit” are actually mutual funds. These companies do not come under the purview of SEBI. On the other hand, mutual funds can mobilize funds from the investors by launching schemes only after getting registered with SEBI as mutual funds.


Where can an investor look for information on mutual funds?

All mutual funds have their own web sites. Investors can also access the NAVs of all mutual funds at the web site of Association of mutual funds in India (AMFI) Investors can log on to the web site of SEBI and go to the “Mutual Funds” section for information on SEBI regulations and guidelines, data on mutual funds, draft offer documents filed by mutual funds, etc. Also, in the annual reports of SEBI available on the web site, information on mutual funds is given.


I have invested in a debt mutual fund scheme. Can I change the nature of the scheme from debt to equity?

It is possible to change the nature of the scheme. However, SEBI has laid down certain regulations which need to be complied with for affecting such a change:

Any changes in the fundamental attributes of the scheme such as the structure, investment pattern, etc., can be changed only when written communication is sent to each unitholder and an advertisement is given in one English daily newspaper having nationwide circulation. The information should also be published in a newspaper published in the language of the region where the head office of the mutual fund is situated. In case the unitholders do not want to continue with the scheme, they have the option of exiting the present scheme at prevailing NAV without bearing exit load.


What is the Net Asset Value of a mutual fund scheme?

The performance of a particular scheme of a mutual fund is indicated by the Net Asset Value (NAV).

NAV represents the market value of the securities held by the scheme. Since the market value of securities changes every day, NAV of the same scheme varies on a day to day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date.

For instance, if the market value of securities of a mutual fund scheme is INR 200 lakh and the mutual fund has issued 10 lakh units of INR 10 each to the investors, then the NAV per unit of the fund is INR 20 (i.e.200 lakh/10 lakh). NAV is required to be disclosed by the mutual funds on a daily basis.
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First Published on Nov 11, 2019 02:53 pm
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