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What are Equity Funds – Equity Mutual Fund Types, Benefits & Returns

What is an equity fund and how does it work? Here is all you need to know about equity mutual funds, its meaning, types, benefits and returns.

In the last 1.5 years, the Nifty has given more than 100% returns. From a bottom of around 7500 in March-April 2020, the Nifty is currently (November 2021) trading around levels of 17,500. These spectacular returns have evinced interest in equity funds among investors from all categories. So, let us understand what equity mutual funds are, the types of equity mutual funds, their benefits, and returns.

What are equity mutual funds?

As per SEBI guidelines, a mutual fund scheme that invests a minimum of 65% of its assets in equity and equity-related instruments is classified as an equity mutual fund scheme. The fund manager decides the equity proportion based on various factors such as macro factors, market sentiment, the financial performance of companies, Government policy, inflation and interest rates, etc. The remaining money is invested in debt products, and some is kept in cash

How do equity funds work?

The fund manager invests the money collected from investors (unitholders) and invests it as per the scheme objective. The unitholders are allotted units of the scheme in proportion to their investment. As the value of the shares, in which the money is invested, goes up, the net asset value (NAV) of the scheme units goes up. When the NAV goes up, the value of the unitholders' investment goes up.

When the shares are not doing well, the NAV goes down, and accordingly, the value of the unitholders’ investment goes down. From time to time, the fund manager may book profits in shares of companies that have done well and replace shares of companies that are not doing well as expected.

Who should invest in equity mutual funds?

Equity mutual funds carry high risk, but at the same time, they have the potential to give inflation-beating high returns. Hence, only those investors who have a high-risk appetite should invest in equity mutual funds. Equity mutual funds can create wealth for you in the long run based on compounding. Hence, only investors with an investment time horizon of more than five years should invest in equity mutual funds.

Types of equity mutual funds

There are various types of equity funds based on their investment objectives. These include:

Types of equity fundsFeatures
Large cap fundOpen ended fund that invests a minimum of 80% of its total assets in equity and equity related instruments of large cap companies.
Mid cap fundOpen ended fund that invests a minimum of 65% of its total assets in equity and equity related instruments of mid cap companies.
Large & mid cap fundOpen ended fund that invests a minimum of 70% of its total assets in equity and equity related instruments of large cap companies (35%) and mid cap companies (35%).
Small cap fundOpen ended fund that invests a minimum of 65% of its total assets in equity and equity related instruments of small cap companies.
Multi cap fundOpen ended fund that invests a minimum of 75% of its total assets in equity and equity related instruments of large (25%), mid (25%), and small cap (25%) companies.
Dividend yield fundOpen ended fund that predominantly invests a minimum of 65% of its total assets in equity and equity related instruments of dividend-yielding companies.
Value fundOpen ended fund following a value investment strategy that invests a minimum of 65% of its total assets in equity and equity related instruments.
Contra fundOpen ended fund following a contrarian investment strategy that invests a minimum of 65% of its total assets in equity and equity related instruments.
Focussed fundOpen ended fund that invests a minimum of 65% of its total assets in equity and equity related instruments of a maximum of 30 stocks across market capitalisation.
Sectoral/thematic fundOpen ended fund that invests a minimum of 80% of its total assets in equity and equity related instruments of a particular sector/theme.
ELSSOpen ended fund that invests a minimum of 80% of its total assets in equity and equity related instruments in accordance with Equity Linked Saving Scheme, 2005 notified by the Ministry of Finance. It has a lock-in period of 3 years and qualifies for deduction from taxable income up to Rs. 1,50,000 in a financial year under Section 80C of the Income Tax Act.

Based on your investment objective, you can choose from the above equity oriented mutual funds to achieve your financial goals.

Performance of equity funds in India

Historically, equity growth funds have provided high inflation-beating returns in India. Following are some equity fund examples and the returns provided by them.

Equity fundAUM (Rs. crores)1 year3 years5 years
Large cap funds
Axis Bluechip Fund33,96633.64%23.19%21.86%
Canara Robeco Bluechip Equity Fund5,06937.63%24.22%20.92%
Mirae Asset Large Cap Fund30,80439.04%20.35%19.16%
Mid cap funds
Axis Midcap Fund15,98852.02%29.87%25.43%
PGIM India Midcap Opportunities Fund3,38877.53%37.81%25.06%
Quant Mid Cap Fund20578.42%31.18%23.36%
ELSS funds
SBI Tax Advantage – Series III31.6860.76%38.59%28.37%
Quant Tax Plan48787.78%38.17%27.39%
Mirae Asset Tax Saver Fund10,14548.13%26.73%24.11%

(Source: www.moneycontrol.com)

Note: The above returns are as of 23rd November 2021. The returns are for direct plans with growth option. The one-year returns are absolute. The three and five-year returns are CAGR. The funds have been ranked based on five-year returns.

The above table shows how equity mutual funds have given inflation-beating high returns over long investment horizons of 5 years. In the table, we have discussed the performance of only three categories of equity funds; you may check the Moneycontrol website for the performance of other categories of equity funds.

Benefits of investing in equity mutual funds

Some of the benefits of investing in equity mutual funds include:

  1. Diversification: These funds invest in a portfolio of 30-50 stocks giving you good diversification.
  2. Expertise: Your money is invested by a fund manager who is qualified, experienced, and has a research team
  3. Low cost: You can invest in mutual funds at a nominal cost that ranges from 0.1-2.25% p.a. (expense ratio).
  4. Lump sum or SIP: You can invest a lump sum amount or start a systematic investment plan (SIP). Most SIPs start from a minimum investment amount as low as Rs. 500/month.

Tax benefits of equity mutual funds

  1. Tax benefit at the time of investment: When you invest in an ELSS, you can claim a deduction of up to Rs. 1,50,000 from taxable income under Section 80C of the Income Tax Act.
  2. Short-term capital gains (STCG) tax: When you sell equity mutual fund units within 12 months of purchase, the short-term capital gains (STCG) tax is charged at 15%.
  3. Long-term capital gains (LTCG) tax: When you sell mutual fund units after 12 months of purchase, the first Rs. 1 lakh LTCG in a financial year is exempt from taxation. The incremental LTCG is taxed at 10% without indexation benefit.

Equity mutual funds are a must for achieving financial goals

Individuals with long-term financial goals with an investment time horizon of more than five years should invest in equity mutual funds. As we have seen earlier, equity mutual funds have the potential to give inflation-beating high returns. They also provide you with tax benefits, diversification, and other benefits at a low cost. Hence, in your financial planning journey, equity mutual funds can be your vehicle to fulfil your financial goals.

To start investing in equity mutual funds for achieving your financial goals, download the Glide Invest App from Google Play Store or Apple App Store and get started.

To read more on similar topics, click here:
Money Market Mutual Fund Explained
Mutual Fund Minimum Investment
Best Flexi Cap Funds

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