What Are Equity Mutual Funds?
Equity mutual funds invest in the stocks of companies with a range of market capitalizations in an effort to produce high returns. Equity mutual funds have the potential to offer more significant returns than debt and hybrid funds since they are the riskiest category of mutual funds. The company’s success significantly influences returns to investors. At least 60% of the assets in equity mutual funds are allocated in equity shares of various companies in balanced amounts. The asset allocation will match the goal of the investment. Depending on the state of the market, the asset allocation may consist only of stocks of large-, mid-, or small-cap companies. The investing approach might be growth- or value-oriented. The balance may be invested in debt and money market instruments after allocating a sizeable part to the equities section. This will handle any unforeseen redemption requests and, to a certain extent, reduce risk. To benefit from shifting market movements and maximise profits, the fund management decides whether to purchase or sell.
Types of equity mutual funds
Equity funds can be categorised in a number of different ways. Here are some examples of the many classifications:
Classification Based on Investment Strategies
Theme and Sectoral Funds – An equity fund may choose to adhere to a particular investing theme, such as an emerging market theme or an international stock theme. Additionally, certain plans may invest in a specific industry segment, such as BFSI, IT, pharmaceuticals, etc. It is crucial to remember that since they concentrate on a particular industry or subject, sector- or theme-based funds pose a higher risk.
Focused Equity Fund: This fund makes up to 30 stock investments in companies with market capitalizations that were defined at the time the scheme was introduced.
Contra Equity Fund: These schemes use a contrarian approach to investing, as the name indicates. These schemes research the market to identify underperforming equities, which are then bought at deep discounts with the expectation that they would eventually see a recovery.
Classification Based on Taxation
Equity Linked Savings Scheme (ELSS): The only equity investment product that qualifies for Section 80C of the Income Tax Act tax advantages of up to Rs. 1.5 lakh is the Equity Linked Savings Scheme (ELSS) Funds. These schemes allocate at least 80% of their total assets to investments in equities and securities connected to equity. These schemes also have a three-year lock-in term.
Non-Tax Saving Equity Funds: Other from the ELSS, all Equity Funds are considered non-tax saving plans. That implies the returns will be taxed as capital gains.
Classification Based on Market Capitalization
Some schemes could choose to invest solely in companies with a certain market capitalization. The typical kinds are listed below:
Large Cap Funds: The stock shares of large-cap companies (the top 100) generally account for at least 80% of their total assets. Compared to mid-cap or small-cap focused funds, these strategies are thought to be more stable.
Mid Cap Funds: These funds typically invest 65% of their total assets in equity shares of mid-cap companies, which are ranked between 101 and 250 in terms of market capitalization. Although they are more volatile than large-cap schemes, these ones often provide higher returns.
Small Cap Funds: These types of funds generally invest 65% or less of their total assets in equity shares of small-cap companies (those ranked 251st and lower by market capitalization). More than 95% of all Indian enterprises are included in this lengthy list. Despite being more volatile than large-cap and mid-cap schemes, these ones frequently provide higher returns.
Multi Cap Funds: Multi-cap funds usually allocate between 65% and 75% of their total assets to equity shares of large-, mid-, and small-cap companies. In these schemes, the fund management continuously rebalances the portfolio to take into account the market and economic environment as well as the scheme’s investment objective.
Large and Mid cap Funds: Large and mid-cap funds allocate 35% of their total assets to equity shares of mid-cap firms and 35% to equity shares of large-cap companies. These investments combine stronger returns with a great deal less volatility.
Classification Based on Investments Style:
Active Funds: The managers of these schemes actively manage them by hand-picking the stocks they intend to invest in.
Passive Funds: These schemes often follow a market index or sector, which chooses the stocks in which the scheme will invest. The fund manager plays no/less active part in choosing the stocks in these schemes.
Why invest in equity mutual funds?
Principal reasons for beginning an equity mutual fund investment:
- Diversification:
The term “diversification” refers to a fund that has been divided up and invested in several or “diverse” portfolios. This implies that you shouldn’t put all of your money into one stock market company, as doing so puts your entire investment at danger if that company experiences losses. Diversification has the same concept as the saying “don’t put all your eggs in one basket.”
- Superior capital growth:
Determine what kind of growth you’re seeking if you want to invest in mutual funds but aren’t sure whether to choose equities or debt funds as your first choice. Equity funds have a greater rate of return than debt funds since they have a superior rate of capital appreciation.
- Tax-saving strategies with equity mutual funds:
You can reduce your tax liability by investing in equity mutual funds. Equity Linked Savings Schemes (ELSS) are a mutual fund that saves on taxes. According to Section 80C of the Income Tax Act, investments in ELSS are tax deductible up to Rs. 1.5 lakh annually. Additionally, up to Rs. 1 lakh in long-term capital gains from ELSS funds are exempt from tax.
Additionally, ELSS has the lowest lock-in period of three years, making it one of the most popular types of mutual fund investment, as compared to other investment choices that qualify for section 80C, such as fixed deposits and public provident fund.
- Long-Term Financial Expansion:
If you are investing with a long-term objective in mind, equity mutual funds are one of the greatest choices. The best way to deal with swings in the stock market is to have long-term investments. This provides the investor with rupee cost averaging, especially if they are using Systematic Investment Plans to make their investments (SIPs).
Staying invested in equities mutual funds can therefore assist you in two ways in realising your long-term objectives. First of all, compared to debt funds, it will provide you with far better returns. Second, because you are investing over a longer period of time, the risk is much reduced.
- Equity Mutual Funds Taxation:
According to the time period for which they are kept, equity mutual funds are subject to two different types of taxes. Both the Long-Term Capital Gains Tax (LTCG) and the Short-Term Capital Gains Tax (STCG) are among these two categories.
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- Long-Term Capital Gain tax (LTCG): Taxes on long-term capital gains are applied to equity funds held for more than a year. Without indexation, the current LTCG tax is 10%. Gains up to INR 1 lakh are not subject to taxation. Additionally, indexation is the process of modifying the investment purchase price for inflation.
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- Short-Term Capital Gain tax (STCG): Taxes on short-term capital gains are applied to equity funds held for less than a year. The revised tax charges for STCG are 15%.
Best perfroming long term equity mutual funds in 2022:
Some best perfroming long term equity mutual funds in 2022 are:
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Best Performing Large Cap Equity Mutual Funds:
| Scheme | 5-Year Return for Regular Plan | 5-Year Return for Direct Plan |
| Canara Robeco Bluechip Equity Fund | 12.73% | 14.27% |
| Axis Bluechip Fund | 11.75% | 13.15% |
| Kotak Bluechip Fund | 11.14% | 12.46% |
| UTI Mastershare Fund | 11.37% | 12.36% |
| Edelweiss Large Cap Fund | 10.81% | 12.29% |
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Best Performing Mid Cap Equity Mutual Funds:
| Scheme | 5-Year Return for Regular Plan | 5-Year Return for Direct Plan |
| Quant Mid Cap Fund | 19.27% | 20.96% |
| PGIM India Midcap Opportunities Fund | 18.23% | 20.27% |
| Axis Midcap Fund | 16.27% | 17.75% |
| Motilal Oswal Midcap Fund | 14.73% | 16.14% |
| Edelweiss Mid Cap Fund | 14.27% | 15.97% |
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Best Performing Small Cap Equity Mutual Funds
| Scheme | 5-Year Return for Regular Plan | 5-Year Return for Direct Plan |
| Quant Small Cap Fund | 20.97% | 22.09% |
| Axis Small Cap Fund | 18.97% | 20.65% |
| SBI Small Cap Fund | 17.25% | 18.58% |
| Kotak Small Cap Fund | 16.85% | 18.46% |
| Nippon India Small Cap | 17.25% | 18.39% |
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Best Performing ELSS Equity Mutual Funds:
| Scheme | 5-Year Return for Regular Plan | 5-Year Return for Direct Plan |
| Quant Tax Plan | 21.39% | 23.15% |
| Canara Robeco Equity Tax Saver Fund | 15.01% | 16.23% |
| Mirae Asset Tax Saver Fund | 13.63% | 15.22% |
| Bank of India Tax Advantage Fund | 13.26% | 14.54% |
| IDFC Tax Advantage (ELSS) Fund | 12.22% | 13.55% |
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Best Performing Multi Cap Equity Mutual Funds:
| Scheme | 5-Year Return for Regular Plan | 5-Year Return for Direct Plan |
| Quant Active Fund | 21.30% | 22.54% |
| Mahindra Manulife Multi Cap Badhat Yojana | 13.78% | 15.96% |
| Nippon India Multi Cap Fund | 13.13% | 13.92% |
| ICICI Prudential Multicap Fund | 11.31% | 12.38% |
| Baroda BNP Paribas Multi Cap Fund | 10.93% | 11.92% |
FAQs
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What are equity mutual funds?
A mutual fund that primarily invests in equity stocks is called an equity fund. A scheme that invests a minimum of 65% of its assets in equities and equity-related securities is referred to be an equity fund in India by SEBI. Compared to debt and hybrid mutual funds, equity funds are riskier. But compared to debt and hybrid funds, they provide a higher return. Changes in the market have an impact on the funds.
Both actively and passively managed best equities mutual funds are available. Based on market capitalization, investing strategy, and investment region, equity mutual funds may be divided into groups. They can be classified as large cap funds, mid cap funds, small cap funds, or multi cap funds depending on the market capitalization. Sector-specific equity funds, which invest in certain industries like banking or FMCG, are another subcategory of equity funds. Additionally, there are international funds that purchase shares in foreign corporations. Equity mutual funds also include equity-linked savings plans. They have a diverse portfolio and invest more than 80% of their assets in stocks. They also qualify for tax deductions under 80C.
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How do equity mutual funds work?
To create an equity mutual fund, fund managers combine funds from many participants. Mutual equity funds may be managed actively or passively. When investing in actively managed funds, the fund managers choose the companies for the portfolio after doing comprehensive market research. Funds that are passively managed replicate the holdings of a benchmark index.No research goes into it. When choosing stocks for the portfolio of actively managed funds, fund managers have access to a variety of methods, including top-down, bottom-up, growth, and value techniques. The goal of fund managers is to optimise returns by combining various asset types. Even with equity funds, a portion of the assets may be put aside for debt or kept in cash to cover redemption costs.
The fund managers charge a fee for their services. The expense ratio is the name of this charge. It comprises of brokerage, office expenses, commissions, fees for managing investments, and expenses for marketing and distribution.
A percentage of NAV is used to compute the expense ratio. Riskier the asset class is, higher will be the expense ratio. As a result, an equity fund’s expense ratio will be greater than a debt funds.
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Who should consider investing in equity mutual funds?
Equity mutual funds are primarily for investors who want to grow their money in a way that keeps it ahead of inflation and is ready to take on moderate to high risk. Investors with lengthy investment horizons can invest in equity mutual funds as they are only appropriate for long-term investments. Different investing requirements are met by the broad selection of equity mutual funds. The finest Section 80C tax-saving plans are the ELSS schemes. These have the shortest lock-in time among other schemes, with a 3 year lock-in.
Under Section 80C, ELSS funds have the potential to provide longer-term investors with better returns. The ideal option for beginner and long-term investors looking for equity exposure would be large cap mutual funds. For seasoned investors, long-term stock diversification will produce positive portfolio returns. They can pick from subcategories including diversified equity funds, mid caps, and small caps.
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