Equity Mutual Funds - A Complete Guide for First-Time Investors

What is an Equity Mutual Fund?

Equity Mutual Funds schemes are investment assets that pool money from multiple investors to purchase companies' stocks. These funds primarily invest in equity shares, aiming to generate high returns over the long term. They are best managed by professional fund managers who help investors pool their funds in a diversified portfolio of stocks and equities, which reduces the risk compared to individual stock investments.

The Securities and Exchange Board of India (SEBI) regulations allow investors to put 65% of their total assets in equity and equity-related instruments. These funds can be further categorized based on market capitalization (large-cap, mid-cap, small-cap), investment style (growth, value), or sectors (technology, healthcare).

Examples of Equity Mutual Funds?

Equity Mutual Funds allow investors to pick funds decided on their risk tolerance, investment horizon, and sector preferences. A few examples of the best Equity Mutual Funds are mentioned below:

1. Large-Cap Equity Funds

• SBI Bluechip Fund
• ICICI Prudential Bluechip Fund

2. Mid-Cap Equity Funds

• HDFC Mid-Cap Opportunities Fund
• Axis Midcap Fund

3. Small-Cap Equity Funds

• Nippon India Small Cap Fund
• Kotak Small Cap Fund

4. Sectoral/Thematic Equity Funds

• Aditya Birla Sun Life Digital India Fund
• Tata Infrastructure Fund

5. Multi-Cap Equity Funds

• Motilal Oswal Flexi Cap Fund
• Parag Parikh Flexi Cap Fund

Features and Benefits of Equity Mutual Funds

Equity Mutual Funds are popular investment options that primarily invest in stocks, offering the potential for high returns. They provide several features and benefits, making them an attractive choice for investors seeking growth, diversification, and professional management of their investments. 

Diversification 

Equity Mutual Funds focus on diverse stocks across different sectors and market capitalizations. This approach reduces the risk of a single stock investment because the performance of different stocks can balance each other out. 

Professional Management 

Learned fund managers will monitor your funds after having conducted thorough research and analysis. Their expertise helps them select the right stocks and time the market effectively to maximize returns on Equity Mutual Funds. 

Risk Management 

Equity Mutual Funds implement various strategies to mitigate risks, such as diversifying investments and conducting rigorous stock analysis. This helps manage market volatility and protect investors' capital. 

Liquidity 

Equity Mutual Funds offer high liquidity. Investors can purchase or sell their fund units on any business day. This flexibility provides easy access to funds when needed, making it convenient for investors. 

Tax Benefits 

Certain Equity Mutual Funds, such as Equity-Linked Savings Schemes (ELSS), offer tax benefits that fall under Section 80C of the Income Tax Act in India. Investors can avail themselves of tax deductions while also aiming for potential capital appreciation.

Types of Equity Mutual Funds

Equity Mutual Funds come in various types, catering to different investment goals, risk appetites, and market segments. Here's an overview of the common types:

Large-Cap Equity Funds: These funds allow investments in well-established, large-cap companies with a strong market presence that offer stability and moderate growth.

Mid-Cap Equity Funds: These funds focus on medium-sized companies with high growth potential, balancing risk and reward.

Small-Cap Equity Funds: Under small-cap equity funds, small-sized companies are targeted to offer significant growth prospects but higher volatility and risk.

Multi-Cap Equity Funds: This involves distributing your funds evenly across large-cap, mid-cap, and small-cap stocks to foster diversified exposure to various market capitalizations.

Thematic Equity Funds: Fund managers invest in stocks that are based on a specific theme or sector, such as technology, healthcare, or infrastructure.

Equity-Linked Savings Scheme (ELSS): These investment options support tax benefits under Section 80C of the Income Tax Act, with a mandatory lock-in period of three years.

Short-Term Equity Funds: They focus on stocks expected to perform well in the short term, typically less than three years.

Long-Term Equity Funds: Aim for long-term capital appreciation by investing in stocks with strong growth potential over a longer period, usually more than five years. These are one of the best Equity Mutual Funds for long-term gains. 

Hybrid Equity Funds: Combine equity investments with debt instruments, offering a balanced approach to growth and stability.

Index Equity Mutual Funds: These Equity Funds allow investors to track a certain stock market index, like the Nifty 50 or S&P 500, aiming to replicate its performance.

Money Market Equity Mutual Funds: Although primarily focused on short-term debt instruments, they may have a small allocation to equities for additional returns.

Debt Mutual Funds: Fixed-income securities like bonds and debentures offer lower risk and stable returns with minimal or no equity exposure.

International Equity Funds: Invest in stocks of companies listed on international markets, providing global diversification.

Other Equity Index Funds: Track specialized indices beyond the major benchmarks, such as sector-specific or thematic indices.

Why Should You Invest in Equity Mutual Funds? 

Investing in Equity Mutual Funds offers the potential for substantial long-term growth, making them an appealing choice for building wealth. They provide diversification, professional management, and the convenience of liquidity, all while allowing investors to participate in the equity market with managed risk. 

Diversification 

Equity Mutual Funds invest across various sectors and market capitalizations, reducing the impact of poor performance by any single stock. This diversification helps spread risk and can enhance overall portfolio stability. 

Tax Benefits 

Certain Equity Funds, like Equity-Linked Savings Schemes (ELSS), offer tax deduction benefits under the Income Tax Act in India. This helps investors to save on taxes while aiming for long-term capital appreciation. 

Convenience

Equity Mutual Funds provide the convenience of professional management, making it easy for investors to participate in the stock market without needing extensive knowledge. Investors can buy or sell fund units easily, providing flexibility and accessibility. 

Dividend Income 

Many Equity Funds distribute dividends to their investors, providing a regular income stream. This is a sound investment plan from both the growth and periodic income perspectives. 

Superior Returns 

Equity Mutual Funds can garner higher returns comparatively over the long term. The growth potential of equities can significantly enhance an investor's wealth. 

Risk Management 

These funds employ various strategies to manage and mitigate risks, including diversification and thorough stock analysis. Professional fund managers work to protect investors' capital while seeking optimal returns. 

Start Small 

Investors can start investing in Equity Mutual Funds with a relatively small amount of money. This makes it accessible for new investors or those with limited capital to begin their investment journey and gradually build their portfolios.

Who Should Invest in Equity Mutual Funds?  

Equity Mutual Funds are suitable for a variety of investors seeking capital appreciation over the long term. They cater to individuals with different risk appetites and investment horizons, providing opportunities for growth through diversified equity exposure.

• Long-Term Investors
• Risk-Tolerant Investors
• New Investors
• Regular Income Seekers
• Tax-Saving Investors
• Young Professionals
• Diversification Seekers

How to Earn Returns from Equity Funds?

Earning returns from Equity Funds involves a combination of capital appreciation, dividends, and strategic investment choices. By understanding these mechanisms and leveraging them effectively, investors can increase their returns while managing risks. 

Here are the primary ways to earn returns from Equity Mutual Funds:

Capital Appreciation

Equity Funds support investment growth, which depends on the increment of the underlying stocks' value in the portfolio. Subsequently, the fund's Net Asset Value (NAV) rises, leading to capital gains. The units can be held for a longer duration to maximize the benefits, especially during favorable market conditions.

Dividends

Some Equity Funds distribute dividends to their investors from the profits earned by the underlying stocks. They can further reinvest their dividends to purchase additional fund units. This compounds the returns over time and generates regular income for the investors.

Systematic Investment Plan (SIP)

 Invest a fixed amount regularly through SIPs so investors can buy units when prices are less. However, focus on buying fewer units when prices are high. Equity Mutual Funds SIPs leverage the benefit of rupee cost averaging while promoting a disciplined investing practice, which can negate the impact of market volatility, leading to steady wealth accumulation over time.

Market Timing and Strategic Allocation

Professional fund managers actively monitor funds and rotate investments across different sectors based on market trends and economic conditions. This approach captures growth in outperforming industries and capitalizes on market opportunities to maximize returns.

Long-Term Investment Horizon

 A long-term investment plan allows returns to generate further returns, significantly enhancing wealth over time. Additionally, it can even manage short-term market fluctuations, providing a more stable growth trajectory.

Capital Gains

Fund units are sold at a higher rate compared to the purchase price, which results in realized capital gains and high overall returns. The appreciation in the value of fund units still underholding represents unrealized gains, contributing to the growth of the investment portfolio.

A Brief Note on Equity Funds Taxation

Taxation on Equity Funds varies based on the holding period of the investment. In India, Equity Mutual Funds are held for over a year. Long-term capital gains (LTCG) tax is levied on them that are currently charged at 10% on gains exceeding ₹1 lakh per financial year. For investments held for one year or less, short-term capital gains (STCG) tax applies at a rate of 15%. Additionally, dividends received from equity funds are subject to taxation as per the investor's applicable income tax slab following the abolition of the dividend distribution tax (DDT) in 2020. Understanding these tax implications can help investors plan their investments more effectively and optimize their post-tax returns.

How do Equity Mutual Funds Work?

Equity Mutual Funds gather money from several investors and place it in a diversified portfolio of stocks, which professional fund managers manage. Here’s a brief overview of how such funds operate:

Pooling of Funds: Investors contribute money to the mutual fund, creating a pool of capital.

Professional Management: Experienced fund managers select and manage a portfolio of stocks on behalf of the investors.

Diversification: Funds are invested in a variety of stocks across different sectors and market capitalizations to spread risk.

Net Asset Value (NAV) Calculation: The fund’s NAV is calculated daily, reflecting the value of its underlying assets and determining the price of fund units.

Buy and Sell Units: Investors can buy or sell units of the mutual fund based on its NAV, offering liquidity and flexibility.

Earning Returns: Returns are earned through capital appreciation and dividends from the underlying stocks in the fund’s portfolio.

H10: Factors to Consider While Investing in Equity Mutual Funds

Equity Mutual Funds’ investments require a thorough evaluation of several factors. These factors support investors in making informed choices to optimize their investment returns. Here are key considerations:

Fund Track Record

Examine the fund's historical performance to assess its consistency and ability to deliver returns over various market cycles.

Fund Objective

Ensure the fund's investment objective aligns with your financial goals, risk tolerance, and investment horizon.

Expense Ratio

Check the expense ratio to understand the costs associated with managing the fund, as lower expenses can enhance net returns.

Fund Manager Expertise

Evaluate the experience and track record of the fund manager, as their expertise plays a significant role in the fund's performance.

How to Pick the Best Equity Mutual Fund?

Selecting the best Equity Mutual Fund involves a comprehensive analysis of several key factors. Such factors ensure the fund aligns with your investment goals and risk profile. By observing these factors, you can choose the best investment unit for your financial needs that caters to your long-term investment objectives.

Here's a brief guide to help you make an informed choice:

Define Your Investment Goals

Identify your financial objectives, such as long-term growth, wealth accumulation, or specific goals like retirement or education funding.

Assess Risk Tolerance

Understand your risk appetite and choose a fund that matches your comfort level with market volatility and potential losses.

Evaluate Fund Performance

Review the fund’s historical performance over different time frames and market conditions to gauge its consistency and resilience.

Check the Fund's Track Record

Investigate the fund’s past performance compared to its benchmark and peer funds to ensure it has a strong track record.

Examine the Expense Ratio

Consider the fund's expense ratio, as lower costs can significantly impact your net returns over time.

Analyze the Fund Manager's Expertise

Research the experience and performance history of the fund manager to ensure they have a successful track record in managing equity funds.

Understand the Fund's Investment Strategy

Ensure the fund’s investment strategy and portfolio composition match your investment goals and risk tolerance.

Consider the Fund's Asset Allocation

Look at the diversification of the fund’s portfolio across sectors, market capitalizations, and geographies to assess its risk management approach.

Review Fund Ratings and Analyst Reports

Use independent fund ratings and analyst reports to gain additional insights into the fund’s performance and management quality.

Monitor Regularly

Once invested, regularly review the fund’s performance and make adjustments as needed to stay aligned with your financial goals.

The Final Takeaway

Equity Mutual Funds offer a compelling investment option for those seeking long-term capital appreciation and portfolio diversification. Such investment portfolios are best managed by professional fund managers who provide an accessible way to participate in the equity market with varying levels of risk tolerance. By understanding key aspects such as fund performance, expense ratios, and management expertise, investors can make informed decisions that align with their financial goals. With their potential for superior returns and flexibility, equity mutual funds can be a valuable component of a well-rounded investment strategy.

Glossary Terms

Net Asset Value (NAV): The per-unit price of an Equity Mutual Fund, calculated daily based on the overall value of the fund's assets minus liabilities.

Expense Ratio: The annual fee expressed as a percentage of the fund's assets, covering management, administrative, and operational costs.

Diversification: This is a practice of spreading investments across various sectors and stocks to reduce risk.

Fund Manager: A professional responsible for making investment decisions and managing the fund's portfolio to achieve its objectives.

Systematic Investment Plan (SIP): This investment strategy allows a fixed amount to be regularly invested in a mutual fund to promote disciplined investing.

Capital Appreciation: The increase in the value of the fund’s underlying stocks contributes to the investment's growth.

Dividend Distribution: Periodic payments are made to investors from the profits generated by the fund’s investments in stocks.

Equity-Linked Savings Scheme (ELSS): This is a type of Equity Mutual Fund in India that offers tax exemption benefits under Section 80C of the Income Tax Act.

Benchmark: A standard index used to compare the performance of the mutual fund, such as the Nifty 50 or BSE Sensex.

Portfolio Turnover Ratio: This measures how frequently fund managers purchase securities within the fund's portfolio during a year and sell them.

FAQs

1. What is an equity mutual fund?

An equity mutual fund is a type of mutual fund that primarily invests in stocks.

2. How to invest in equity mutual funds?

Ans. You can invest in equity mutual funds through online platforms, financial advisors, or directly with the fund house.

3. Which is better, equity or mutual funds?

Ans. Equity refers to stocks, while mutual funds pool investments in various securities; the choice depends on individual risk tolerance and investment goals.

4. What is the difference between ELSS and equity mutual funds?

Ans. ELSS (Equity-Linked Savings Scheme) is a type of equity mutual fund that offers tax benefits under Section 80C of the Income Tax Act.

5. What is the difference between equity and debt mutual funds?

Ans. Equity mutual funds invest in stocks, while debt mutual funds invest in fixed-income securities like bonds.

6. What is the difference between equity and mutual funds?

Ans. Equity refers to individual stocks, whereas mutual funds are pooled investment vehicles that can invest in equities, debt, or other assets.

7. How are equity mutual funds taxed?

Ans. Long-term capital gains (held for more than one year) are taxed at 10% for gains above ₹1 lakh, while short-term capital gains (held for one year or less) are taxed at 15%.

8. How to buy equity mutual funds?

Ans. Equity mutual funds can be bought online through fund houses, brokers, or investment platforms.

9. How to invest in equity mutual funds in India?

Ans. In India, you can invest in equity mutual funds through SIPs, lumpsum investments, and via online platforms or financial advisors.

10. Are equity mutual funds taxable?

Ans. Yes, equity mutual funds are subject to capital gains tax based on the holding period and dividend income is taxed as per the investor’s tax slab.

11. What is the best equity mutual fund?

Ans. The best equity mutual fund depends on individual financial goals, risk tolerance, and market conditions; research and comparisons are necessary.

12. Are equity mutual funds risky?

Ans. Yes, equity mutual funds are subject to market risks and can be volatile.

13. What is exit load?

Ans. An exit load is a fee charged by a mutual fund when units are redeemed before a specified period.

14. Are returns guaranteed on mutual funds?

Ans. No returns on mutual funds are not guaranteed as they depend on market performance.

15. How are mutual fund returns calculated?

Ans. Mutual fund returns are calculated based on the change in the Net Asset Value (NAV) over the investment period.

16. Are returns from mutual funds taxable?

Ans. Yes, returns from mutual funds are taxable as capital gains and dividend income is taxed as per the applicable tax slab.

17. How to check mutual funds KYC?

Ans. Mutual fund KYC status can be checked online through the KYC registration agency (KRA) websites using PAN details.

18. How to invest in SIP?

Ans. To invest in SIP, select a mutual fund scheme, set a fixed investment amount, choose the SIP frequency, and register through a fund house or investment platform.

19. What are tax saving schemes?

Ans. Tax saving schemes, like ELSS, offer tax benefits under Section 80C of the Income Tax Act, helping investors save on taxes while investing.

20. What is an assured return scheme?

Ans. An assured return scheme guarantees a specific return on investment, unlike mutual funds which are subject to market risks.

21. What is a dividend option?

Ans. The dividend option in mutual funds provides periodic payouts to investors from the fund's profits.

22. What is NAV in mutual funds?

Ans. NAV (Net Asset Value) is the per-unit price of a mutual fund, calculated as the total value of the fund’s assets minus liabilities, divided by the number of outstanding units.

23. What is the total expense ratio?

Ans. The total expense ratio (TER) is the annual fee expressed as a percentage of the fund's assets, covering all management and operational costs.