What are Equity Funds – Equity Mutual Fund Types, Benefits & 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 funds||Features|
|Large cap fund||Open ended fund that invests a minimum of 80% of its total assets in equity and equity related instruments of large cap companies.|
|Mid cap fund||Open 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 fund||Open 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 fund||Open ended fund that invests a minimum of 65% of its total assets in equity and equity related instruments of small cap companies.|
|Multi cap fund||Open 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 fund||Open ended fund that predominantly invests a minimum of 65% of its total assets in equity and equity related instruments of dividend-yielding companies.|
|Value fund||Open ended fund following a value investment strategy that invests a minimum of 65% of its total assets in equity and equity related instruments.|
|Contra fund||Open ended fund following a contrarian investment strategy that invests a minimum of 65% of its total assets in equity and equity related instruments.|
|Focussed fund||Open 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 fund||Open ended fund that invests a minimum of 80% of its total assets in equity and equity related instruments of a particular sector/theme.|
|ELSS||Open 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 fund||AUM (Rs. crores)||1 year||3 years||5 years|
|Large cap funds|
|Axis Bluechip Fund||33,966||33.64%||23.19%||21.86%|
|Canara Robeco Bluechip Equity Fund||5,069||37.63%||24.22%||20.92%|
|Mirae Asset Large Cap Fund||30,804||39.04%||20.35%||19.16%|
|Mid cap funds|
|Axis Midcap Fund||15,988||52.02%||29.87%||25.43%|
|PGIM India Midcap Opportunities Fund||3,388||77.53%||37.81%||25.06%|
|Quant Mid Cap Fund||205||78.42%||31.18%||23.36%|
|SBI Tax Advantage – Series III||31.68||60.76%||38.59%||28.37%|
|Quant Tax Plan||487||87.78%||38.17%||27.39%|
|Mirae Asset Tax Saver Fund||10,145||48.13%||26.73%||24.11%|
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:
- Diversification: These funds invest in a portfolio of 30-50 stocks giving you good diversification.
- Expertise: Your money is invested by a fund manager who is qualified, experienced, and has a research team
- Low cost: You can invest in mutual funds at a nominal cost that ranges from 0.1-2.25% p.a. (expense ratio).
- 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
- 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.
- 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%.
- 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.