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Equity Oriented Mutual Funds – Overview, Types and How are they Taxed

Want to know about Equity mutual funds? Here is a comprehensive guide to Equity mutual fund, its types, benefits and how to invest in them.
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In the short run, equities experience volatility and hence are risky. But, in the long run, equities have the potential to give inflation-beating high returns and create wealth for you. Equities as an asset class can help you achieve your financial goals. This article focuses on equity-oriented mutual funds – Overview, types, and how they are taxed.

What are equity-oriented mutual funds?

Equity oriented mutual funds are a financial product offered by asset management companies (AMCs) and primarily invest in equity and equity-related instruments of various companies. In an equity-oriented fund, the percentage of equities may vary depending on the fund's objective. However, for taxation purposes, a fund where the equity proportion is 65% or higher at all times is classified as an equity fund.

Depending on the type and objective of the scheme, an equity-oriented mutual fund may invest in companies based on:

  1. Market capitalisation (large, mid, small companies)
  2. Sector (banking, IT, pharma, metals, etc.) or theme (digitisation, rural, ESG, consumption, etc.)
  3. Tax benefits (Equity Linked Savings Scheme (ELSS)
  4. Multiple asset classes (Aggressive hybrid fund, balanced advantage fund, multi-asset allocation, etc.)
  5. Index (Nifty 50, Nifty Next 50, Nifty Midcap 150, Nifty Smallcap 250, etc.) 

An investor can choose an equity-oriented fund based on their risk appetite, investment objective, investment time horizon, expected returns, etc.

How do equity-oriented mutual funds work?

Whenever a fund house launches a new equity oriented scheme, an investor can invest during the New Fund Offering (NFO) or any time later. The minimum lumpsum investment amount during the NFO is usually Rs. 5,000. The fund house collects the money and allot scheme units to the unitholder in proportion to their investment.

The NAV of the scheme depends on the value of the underlying securities that the scheme is holding. The fund house declares the NAV at the end of every business day. The profit or loss of a unitholder depends on the difference between the current NAV and the price at which they bought the units.

Who should invest in equity oriented mutual fund schemes?

All equity-oriented mutual fund schemes are risky as equity markets are volatile in the short term. However, in the long run, equities have the potential to give good returns and create wealth for investors. So, if you have an aggressive risk profile and a long investment time horizon, you may consider investing in equity-oriented mutual fund schemes. You can start a systematic investment plan (SIP).

Types of equity-oriented schemes

SEBI has categorised equity-oriented schemes into various subcategories. :

Equity scheme categoryFeatures
Large-cap fundOpen-ended equity scheme that invests a minimum of 80% of its total assets in equity and equity-related instruments of large-cap companies.
Mid-cap fundOpen-ended equity scheme that invests a minimum of 65% of its total assets in equity and equity-related instruments of mid-cap companies.
Small-cap fundOpen-ended equity scheme that invests a minimum of 65% of its total assets in equity and equity-related instruments of small-cap companies.
Multi-cap fundOpen-ended equity scheme that invests a minimum of 75% of its total assets in equity and equity-related instruments of large-cap (25%), mid-cap (25%), and small-cap (25%) companies.
Flexi-cap fundOpen-ended equity scheme that invests a minimum of 65% of its total assets in equity and equity-related instruments of various companies.
Sectoral/thematic fundOpen-ended equity scheme that invests a minimum of 80% of its total assets in equity and equity-related instruments of a particular sector/theme companies.
Equity-linked savings scheme (ELSS)Open-ended equity scheme that invests a minimum of 80% of its total assets in equity and equity-related instruments in accordance with Equity Linked Saving Scheme, 2005 as notified by the Finance Ministry. The scheme provides income tax benefits at the time of investment and has a lock-in period of 3 years.

(Source: https://www.sebi.gov.in/legal/circulars/oct-2017/categorization-and-rationalization-of-mutual-fund-schemes_36199.html)

Taxation of equity funds

From a taxation point of view, any mutual fund scheme that has a minimum of 65% of its total assets in equity and equity-related instruments is classified as an equity scheme.

Short-term capital gains (STCG) tax:

  • If an equity mutual fund units is sold within 12 months of investing, short-term capital gain (STCG) will be levied at 15%.

Long-term capital gains (LTCG) tax:

  • If an equity mutual fund is sold after 1 year of investing, long-term capital gain (LTCG) will come into play. Every financial year, the 1st Rs. 1 lakh will be exempt from LTCG. LTCG will be taxed at 10% above Rs. 1 lakh.

In the above section, we saw how all equity schemes are taxed at the time of redemption. The ELSS provides tax benefits at the time of investment. At the time of investing in an ELSS, an investor can avail of deduction from taxable income under Section 80C of the Income Tax Act. The maximum deduction allowed in a financial year is Rs. 1,50,000 or the amount invested, whichever is lower. 

The ELSS has a lock-in period of three years. If you invest through a SIP, the 3-year lock-in period will apply to every SIP instalment.

To start investing in an equity SIP as per your appropriate asset allocation, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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