Equity Mutual Funds – Types And Benefits

Introduction

Saakshi was working in Pune, and she lived with her daughter alone. She was very busy with her working schedules and could not take out time to understand Equity Mutual Funds. She started looking for an expert in this field so that the expert could guide her. After many background checks, she meets an expert and gets all the details about Equity mutual funds. After hearing him and knowing about how Equity funds can be classified in various ways and how it provides versatility and liquidity to the investor, she invested in parag parikh long term equity fund, and now she is secure about her daughter’s future.

What are Equity Funds?

Equity funds, as the name implies, invest in the stock of various firms. The fund manager maximizes profits by diversifying his holdings among firms from multiple industries and market capitalizations.

How Do Equity Funds Work?

Equity funds can be classified in a variety of ways. Here’s a breakdown of the many classifications:

Categorization of Investment Strategies

• Theme and sectoral Funds – An equity mutual fund may choose to invest in a particular investing theme, such as foreign stocks or developing markets. It’s worth noting that because they specialize in a specific area or subject, sector or theme-based funds incur a higher risk.
• Focused Equity Fund – This fund invests in up to 30 equities of firms with market capitalizations that are defined just at the time of a scheme’s commencement.
• Contra Equity Funds — As the name implies, these funds invest in the opposite direction of the market. These schemes comb the market for the underperforming equities and buy them at bargain prices to expect they would rebound in the long run.

Categorization based on market capitalization

Some funds may choose to invest solely in firms with certain market capitalizations. They are as follows:

• Large-Cap Funds — These funds generally invest at least 80% of their total assets in large-cap company stock (the top 100). These funds are seen to be more stable than those concentrating on mid-cap or small-cap stocks.
• Mid-Cap Funds – invest around 65 per cent of their total assets in equity shares of mid-cap corporations ranked 101-250th in terms of market capitalization. These funds tend to provide greater returns than large-cap funds, but they are also more volatile.
• Small-Cap Funds — These funds generally invest roughly 65 per cent of their total assets in equity shares of small-cap firms with a market capitalization of $251 million or less. This is a massive list, with over 95% of all Indian businesses coming under this category. These funds have higher returns than large-cap and mid-cap funds, but they are also more volatile.
• Multi-Cap Funds — invest roughly 65 per cent of the overall assets in large-cap, mid-cap, and small-cap firms in varied quantities. In these plans, the fund manager regularly rebalances the portfolio to fit the market and economic conditions and the scheme’s investment objective.
• Large and Mid-Cap Funds — These funds typically invest 35 per cent of their total assets in mid-cap stocks and 35 per cent in large-cap stocks. These funds provide a superb combination of lower volatility and higher returns.

Categorization based on Tax Treatment 

Equity Linked Savings Program (ELSS) -Under Section 80C of the Income Tax Act, ELSS Funds are the sole equity program that provides up to Rs tax benefits. 1.5 lakh. At least 80% of these funds’ total assets must be invested in stocks and equity-related products. These equity mutual fund plans also have a three-year lock-in period.

Non-Tax Saving Equity Funds — Except for ELSS, all other Equity Funds are non-tax saving programs. The earnings are thus taxed as capital gains. 

Characteristics of an Equity Fund

Here are some key characteristics of Indian equity mutual funds:

Lower Expense-to-Revenue Ratio

Regular buying and selling of shares in an Equity Fund might cause the scheme’s expense ratio to rise. The Securities and Exchanges Board of India (SEBI) has set a maximum cost ratio of 2.5 per cent for equity funds. SEBI may perhaps lower it further. For investors, this equals higher returns.

Section 80C of the Internal Revenue Code exempts you from paying taxes

The Equity Linked Savings Scheme, or ELSS, gives tax exemption under Section 80C of the Income Tax Act with exposure to equities. It has a three-year lock-in term and a high potential for making high returns. An ELSS can also be purchased in instalments.

Diversification of your portfolio

By investing a small amount in an equity fund, you can obtain exposure to multiple attractive stock shares. As a result, your stock portfolio is more diversified, and you have a higher chance of achieving strong returns.

Investing in Equity Mutual Funds Has Its Advantages

Anyone may invest in the stock market using equity funds without worrying about picking particular stocks or sectors. In the past, individuals who had a good understanding of the market might make a lot of money in the stock market. On the other hand, Equity Mutual Funds hire skilled fund managers to research on your behalf. The benefits of investing in equity funds are:

• Experts are in charge of your investment.
• It’s cost-effective.
• Convenient
• It provides a variety of options.
• Investing methodically is an option (instalments)
• It provides versatility and liquidity.