Introduction to Equity Mutual Funds

When you think of investing in mutual funds, the first thing that comes to mind is equity mutual funds. These are the most sought out mutual funds for potential inflation beating returns as it involves a pool of stocks available for investment.

The task of choosing value stocks for an individual to invest in for long term to create wealth is a challenge as he is not adept at it. Equity funds is that investment vehicle which offers potential high returns in a simplified and convenient manner. Equity funds can be active or passive funds, but predominantly it holds multiple equity stocks.

- What is Equity Mutual Funds?

Equity mutual funds are a category of mutual funds that invests a minimum of 65% of its assets into equity stocks as per Securities and Exchange Board of India (SEBI) prescribed limits. These funds hold equity stocks of various companies in diversified form to earn potential optimum returns.

As equity fund investments are market linked the risk of investment is extremely high as compared to other types of mutual funds. Also note, equity funds are ‘not one size fits all’. There are a variety of equity funds which are sub-categorised by their investment objective and investment style.

Most of the equity funds are actively managed funds, while exchange traded funds (ETFs) and index funds are passively managed funds.

- Types of Equity Funds

Equity mutual funds are mostly categorised according to the company size, the investment style of the holdings in the portfolio and geography.

Sometimes, the funds can also be categorised by whether they are domestic (investing in stocks of only Indian companies) or international (investing in stocks of overseas companies). Further based on broader markets, regionality or one country based it could be done.

1. Large-cap Equity Funds

   Large cap funds are those equity schemes that invest in top one hundred companies, i.e. large cap companies listed between 1 to 100 based on full market capitalisation on the stock exchange. These companies are well established firms, hence are comparatively stable and tend to show resilience towards market volatility.

   These funds are the least risky among equity funds. Their minimum exposure to such stocks is 80% of the total assets.

2. Mid-cap Equity Funds

   Mid-cap mutual fund schemes invest in mid-cap companies which are listed and ranked between 101 and 250 based on full market capitalization. Such companies are future large caps with a potential to grow moderately and have potential to offer higher returns than large caps.

   These funds are less risky than small-cap funds but has high risk than large-cap funds. The assets within the portfolio of the funds have a minimum 65% exposure to equity stocks as per the SEBI mandate.

3. Large- & Mid-cap Equity Funds

   Large- and Mid- cap equity funds holds stocks of large and mid-cap companies. Large cap companies offer stability and resilience while mid-caps give a kicker of moderately higher returns.

   The asset allocation of the portfolio of these funds is equally divided between stocks of large and mid-caps that have a potential to offer high returns. The minimum exposure of stocks of each market cap (large and mid) is mandated to be 35% of total assets as per SEBI. These funds are high risk investments but less risky than small cap funds.

4. Small-cap Equity Funds

   Small cap mutual fund schemes invest in small cap companies ranking above 250 in terms of their full market capitalization (as per SEBI guidelines) on the stock exchange. These small size companies have the potential to generate high returns.

   These funds are extremely high risk due to within equity funds but can offer higher returns due to severe volatility in the markets. The assets within the portfolio of the funds have a minimum 65% exposure to equity stocks as per the SEBI mandate.

5. Multi-cap funds

   Multi-cap equity funds invest in equity stocks of large-, mid-, and small-cap companies. As per SEBI mandate, at least 25% each is to be allotted to large-, mid-, and small-cap companies in the portfolio of the fund.

   These funds minimum equity stock exposure must be 75% thus making it high risk investment option. The diversification ensures potential optimal returns from all the market caps.

6. Flexi-cap funds

   Flexi-cap equity mutual fund invest in stocks across sectors from all market capitalisations, i.e., small-, mid-, and large-cap companies. While portfolio construction of these equity funds, the proportion of stocks from each market cap is as per the fund managers discretion, with minimum The fund invests a minimum of 65% of its assets in equity and equity related instruments across market capitalization as per SEBI mandate.

   These funds are suitable for investors seeking investments across industries without any restrictions to any market cap or sector. They tend to balance risk and return to capitalise on market trends and benefit from dynamic investment strategy.

7. Sectoral funds

   Sectoral mutual funds are specialty equity funds that target specific business sectors, such as health care, IT, banking, infrastructure, etc. These funds invest in companies from across market capitalisation relevant to the specific sectors to capture potential gains from it. As per the mandate minimum equity exposure must be at least 80%. Such funds have extremely high risk as the portfolio is concentrated.

8. Thematic funds

   Thematic are equity mutual funds that focus on the wave of emerging trends in the market that are expected to experience significant growth or transformation in the future. ESG, energy, MNC, technology etc. are examples of few trends in the markets.

   SEBI mandates that 80% of asset allocation of assets must be to equities and equity-related instruments of a thematic fund.

   They invest in various sectors and a wide array of companies that are centered around a specific idea or a theme. This theme/idea might show huge growth potential because of socio-political and macro-economic factors.

9. Dividend Yield Funds

   Dividend yield Funds are those equity mutual funds that primarily invest in companies that offer high dividends. Such equity funds invest a minimum of 65% of its assets in high dividend yielding equity and related instruments as per SEBI guidelines.

   The portfolio of dividend yield funds usually consists of established companies, that pay higher dividend yields as compared to the average market.

10. Index funds

    Index funds are passive funds which try to mirror the performance of a stock index like Nifty 50 or S&P BSE Sensex. Fund managers of these funds invest in same stocks in same proportion as the index without employing any investment strategies of fund selection. These funds as per the index holds stocks from across various sectors.

11. ELSS (Equity linked savings scheme)

    Equity-Linked Savings Schemes (ELSS fund) are a tax-saving mutual fund investment scheme that invest in equity and equity-related schemes with the lowest lock-in period of 3 -years.

    These mutual funds will provide potential inflation-beating market linked returns and help save taxes under Section 80C of the Income Tax Act, 1961. An amount of up to Rs 1.50 lakhs can be deducted from your taxable income by investing an equal amount in ELSS fund in a fiscal year.

12. Value funds

    Value equity funds invest in stocks from across market cap and across sectors based on an approach of intrinsic worth of the stock. The stocks of such companies have low price-to-book (P/B) and/or price-to-earnings (P/E) ratio. Fund managers select stocks that seem to be undervalued but have potential to grow over long term.

13. Contra funds

    Contra Mutual Funds invests against the existing market trends and purchases stocks that are not performing well currently. The fund manager takes a contrarian view of the stock when it is shunned by the investors and when there is a superlative demand for the same. The stock selection is done based on the objective that the companies are not performing well in the short term and will turn around. It can be cyclical headwinds turning into tailwinds, understanding macro trends are a few ways in which one can identify turnaround opportunities.

Top Benefits of investing in Equity Funds

Here are top benefits of investing in equity mutual funds:

1. Portfolio Diversification and Risk Mitigation:

   As there are multiple stocks held in the portfolio of an equity mutual fund,

   The multiple stocks held in the portfolio from across sectors offer diversification to efficiently mitigate the risk of equity market investment.

2. Potential higher returns:

   Investing in a basket of various stocks ensures that equity fund benefits to earn potential higher returns from multiple investments.

3. High Liquidity:

   Redeeming your mutual fund units for access to cash for financial needs is easily possible on any working day. The redemption request gets processed within 3 to 4 days, depending upon the type of the scheme, with the amount being credited in your bank account.

4. Professionally managed:

   The equity mutual funds are managed professionally by fund managers who have expertise, resources, and experience to actively buy, sell and monitor investments continuously. Through continuous monitoring of investments, the fund managers rebalance the portfolio to meet the scheme’s objectives.

5. Tax efficient:

   Capital gains tax would be paid only by the investor based on his investment period, it could be short term or long term. A limit of Rs 1 lakh for capital gains is allowed in a financial year.

   Additionally, investment in ELSS up to Rs 150,000 qualifies for tax benefit under section 80C of the Income Tax Act, 1961.

6. Convenient and ease of access:

   Conveniently invest in mutual funds through a lumpsum or systematic investment plan. You can do it easily through a distributor or directly through the asset management company (AMC). Investing in equity mutual funds.

7. Well regulated

   Securities and Exchange board of India (SEBI) is the regulatory body governing the mutual fund industry and has set multiple frameworks to make mutual investment investor friendly.

8. Easy on the pocket:

   You can invest in equity mutual funds with small amounts diligently via SIP. Thus, making investing in equity markets affordable.

How to invest in Equity Funds?

There are several ways to invest in any equity mutual fund, provided the investor is Know Your Customer (KYC) Compliant.

• Physically, you can invest by filling in an application form and submitting it along with a cheque or bank draft at the branch office or designated Investor Service Centers (ISC) of Mutual Funds or Registrar & Transfer Agents (RTAs) of the AMC.
• You can also choose to invest online directly through our websites or through our app. For more information, please see here.
• Additionally, you can invest with the help of / through a financial intermediary i.e., a Mutual Fund Distributor registered with AMFI. An individual or an entity such as bank, brokering house or online distribution partner licensed with distributing rights of mutual fund is known as a Mutual Fund Distributor.

FAQs on Equity Mutual Funds