Equity funds aim to generate high returns by investing in the shares of companies of different market capitalization. They generate higher returns than debt funds or fixed deposits. How the company performance results in profit or loss decides how much an investor can make based on his shareholdings.
An equity fund invests 60% or more of its assets in equity shares of companies in varying proportions. This should be in line with the investment mandate. It might be a purely large-cap, mid-cap or small-cap fund or a mixture of market capitalization. Moreover, the investing style may be value-oriented or growth-oriented.
After allocating a major portion of equity shares, the remaining amount will go to debt and money market instruments. This is to take care of sudden redemption requests as well as bring down the risk level to some extent. The fund manager makes buying or selling decisions to take advantage of the changing market movements and reap maximum returns.
Your decision to invest in equity funds must align to your risk tolerance, investment horizon and goals. Generally, if you have a long-term goal (say, 5 years or more), it is better to go for equity funds. It will also give the fund ample time to ride out the market fluctuations.
If you are a budding investor who wants to have exposure to the stock market, then large-cap equity funds may be the right choice. These funds invest in equity shares of the top 100 companies of the stock market. These well-established companies have been historically delivering stable returns over the long-term.
In case you are well-versed with the market pulse but want to take calculated risks, you may think of investing in diversified equity funds. These invest in shares of companies across market capitalisation. These give optimum combination of high return and lesser risk as compared to equity funds that only invest in small-cap/mid-caps.
ELSS is the only tax-saving investment under Section 80C of the Income Tax Act that gives you equity exposure (other than NPS). With its shortest lock-in period of 3 years and high return potential, ELSS has a good track record . You can invest in small but regular installments or a lumpsum as per your affordability.
The frequent buying and selling of equity shares often impacts the expense ratio of equity funds. Currently, SEBI has fixed the upper limit of expense ratio at 2.5% for equity funds and is planning to reduce it further. A lower expense ratio, of course, translates into higher returns for investors.
When you redeem units of equity funds, you earn capital gains. These capital gains are taxable in your hands. The rate of taxation depends on how long you stayed invested in equity funds; such a period is called the holding period.
By investing in equity funds you can get exposure to a number of stocks by investing a nominal amount.
For instance, if you have Rs 2,000 to invest, you will be able to buy one stock of a large-cap company or one stock of 2-3 mid-cap companies. However, your portfolio will face concentration risk. But with the same amount you can get exposure to a lot many stocks when you invest in equity funds. This allows you to diversify and benefit meaningfully.
You can categorize equity funds based on their investment mandate and the kind of stocks and sectors they invest in.
Equity funds that focus their investments on a particular sector or theme fall under this category. Sector funds invest in one particular industry, like FMCG or Pharma or Technology. Thematic funds follow a particular theme, like emerging consumer companies or international stocks.
Since sector funds and thematic funds focuses on a particular sector or theme, they tend to be riskier. This is because their performance face sectoral as well as market risks. However, sector and thematic funds can be diversified in terms of market capitalisation.
Large-cap equity funds: Typically, large-cap companies are well-established companies, making them large-cap funds stable and reliable investments.
Mid-cap equity funds: They invest in medium sized companies.
Mid-and-small-cap funds: There are even funds that invest in both mid-cap as well as small-cap funds.
Small-cap funds: Since smaller companies are prone to volatility, small-cap funds deliver fluctuating returns.
Multi-cap funds: Equity funds that invest across market capitalisation, which is in large-cap, mid-cap and small-cap stocks, are called multi-cap funds.
All the funds discussed above follow active investing style, wherein the fund manager decides the portfolio composition. However, there are funds whose portfolio composition imitate a specific index.
Equity funds that follow a particular index are called index funds. These are passively-managed funds that invest in the same companies, in the exact same proportions, making up the index the fund follows.
Example, a Sensex index fund will have investments in all 30 Sensex companies in the same proportion in which the companies form part of the index. Index funds are low-cost funds as they don’t require the active management of a fund manager.
Amongst all other categories of mutual funds, equity funds generally deliver the highest returns. On an average, equity funds have generated before-tax returns in the range of 10%-12%. These returns may fluctuate as per market movements and overall economic conditions.
To earn returns in line with your expectations, you need to choose your equity funds carefully. For that, you have to closely follow the stock markets and possess knowledge of the quantitative and qualitative factors. ClearTax provides assistance by handpicking the top-performing investment portfolios for you which suits your financial goals.
The benefits of investing in mutual funds are many:
a. Expert money management
b. Low Cost
e. Systematic investments
The major benefit of investing in equity funds is that you don’t need to worry about choosing stocks and sectors to invest in. Successful equity investing requires a lot of research and knowledge. You need to dig deep into the financials of a company before you invest in it.
You also need to have an understanding of how a particular sector is expected to perform in the future. Of course, all of this requires a lot of time and effort, which most common investors don’t have. Hence, the solution is to leave the stock picking to an expert fund manager by investing in an equity fund.
Capital gains earned on the holding period of up to one year are called short-term capital gains (STCG). STCG are taxed at the rate of 15%.
Conversely, capital gains made on holding period of more than 1 year are called long-term capital gains (LTCG). Owing to changes in budget 2018, LTCG in excess of Rs 1 lakh will be taxed at 10% without the benefit of indexation.
If you can afford to invest a lump-sum in one go per annum, this method too can work over time. However, not everyone funds it feasible to arrange for a large sum and opts for SIPs instead.
An SIP is usually a monthly investment that happens automatically on a pre-decided date. You give a mandate to the fund company to deduct the investment from your bank account.
SIPs give you the benefit of rupee-cost averaging. This means that when the markets are high, you will be allotted fewer units. And when the markets are low, you will get more units for the same amount. This way, you invest at different levels of the market. SIPs also inculcate financial discipline and make mutual funds affordable for all.
Click here to start a SIP in equity mutual funds.