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Equity Mutual Funds – Features, Types & Benefits

Last Updated : 30 Nov, 2023
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Equity Mutual Funds can be defined as a pool of funds collected from various investors and invested in a diversified portfolio of equities (stocks) across different sectors and market capitalisations. Equity mutual funds are a popular investment option that offers individuals the opportunity to invest in the stock market without directly buying individual stocks. Equity mutual funds are known for their potential to deliver long-term capital appreciation, making them an attractive choice for those looking to participate in the growth potential of the stock market.


Features of an Equity Fund

1. Professional Management: Equity mutual funds are managed by experienced fund managers who make investment decisions on behalf of investors.

2. Diversification: Funds diversify investments across multiple stocks, reducing the impact of poor performance in individual stocks.

3. Liquidity: Investors can easily buy and sell units of equity mutual funds, providing liquidity.

4. Transparency: NAV is calculated daily, providing transparency in the fund’s value.

How does an Equity Mutual Fund Work?

1. Pooling of Funds: Investors pool their money into a mutual fund scheme, which is managed by a professional fund manager or a team of experts.

2. Diversification: The fund manager diversifies the fund’s portfolio by investing in a mix of stocks across various sectors and industries. This diversification helps spread risk.

3. NAV Calculation: The Net Asset Value (NAV) of the fund is calculated daily. It represents the per-unit value of the fund and is based on the total market value of the underlying assets.

4. Units Allocated: When investors invest in the fund, they are allocated units equivalent to the amount they invest. The number of units depends on the prevailing NAV.

5. Active Management: Active fund managers continuously monitor the market and make investment decisions to optimize returns while managing risk.

6. Redemption and Dividends: Investors can redeem their units at any time at the prevailing NAV. Equity mutual funds may also distribute dividends to investors from the profits earned by the fund.

Types of Equity Mutual Funds

1. Large-Cap Funds: These funds predominantly invest in stocks of large-cap companies, which are well-established and known for their stability. They offer relatively lower risk compared to mid-cap and small-cap funds.

2. Mid-Cap Funds: Mid-cap equity mutual funds invest in stocks of mid-sized companies. These funds have the potential for higher returns but come with higher volatility compared to large-cap funds.

3. Small-Cap Funds: Small-cap equity funds focus on stocks of small-sized companies. They have the highest growth potential but are also the riskiest among equity mutual funds.

4. Multi-Cap Funds: Multi-cap funds have the flexibility to invest in stocks across market capitalisations. This allows fund managers to adapt to changing market conditions and invest in opportunities across the spectrum.

5. Sectoral/Thematic Funds: These funds concentrate their investments in specific sectors or themes, such as technology, healthcare, or infrastructure. They are suitable for investors who want to target specific industries.

6. Dividend Yield Funds: These funds primarily invest in dividend-paying stocks, making them suitable for income-oriented investors. They aim to provide regular dividends along with capital appreciation.

7. Value Funds: Value-oriented equity mutual funds look for stocks that are undervalued or trading below their intrinsic value. They follow a value investing strategy.

8. Growth Funds: Growth funds focus on companies with high growth potential. They invest in stocks of companies that are expected to grow faster than the market average.

How should you Invest in an Equity Mutual Fund?

1. Set Financial Goals: Define your investment objectives and time horizon. This will help you choose the right type of equity fund.

2. Risk Tolerance: Assess your risk tolerance. Different equity mutual funds come with varying levels of risk, so select one that matches your risk profile.

3. Research and Selection: Research different mutual fund schemes and fund houses. Consider factors like past performance, fund manager’s track record, and expense ratio.

4. Diversification: To minimize risk, consider investing in a mix of equity funds that cover various sectors and market caps.

5. Systematic Investment: Consider setting up a Systematic Investment Plan (SIP) to invest a fixed amount regularly. This helps in rupee cost averaging.

Benefits of Investing in Equity Mutual Funds

1. Potential for High Returns: Equity mutual funds have the potential to offer higher returns compared to other asset classes over the long term.

2. Diversification: Investors gain exposure to a diversified portfolio of stocks, reducing the impact of individual stock volatility.

3. Professional Management: Expert fund managers make informed investment decisions, increasing the chances of generating optimal returns.

4. Liquidity: Easy buy and sell options provide liquidity and flexibility to investors.

5. Convenience: Mutual funds handle administrative tasks such as record-keeping, making it easier for investors.

Taxation Rules of Equity Funds

1. Long-term Capital Gains (LTCG): If you hold equity mutual fund units for more than one year, the gains up to ₹1 lakh are exempt from tax. Gains exceeding ₹1 lakh are taxed at a flat rate of 10%.

2. Short-term Capital Gains (STCG): If you redeem equity mutual fund units within one year, the gains are taxed at a rate of 15%.

3. Dividend Distribution Tax (DDT): As of April 1, 2020, DDT is not applicable to equity mutual funds. Dividends received from equity mutual funds are now taxable in the hands of investors at their applicable tax rates.

4. Securities Transaction Tax (STT): STT is applicable to the sale of equity mutual fund units. It is deducted at the time of redemption.

In conclusion, equity mutual funds offer investors a way to participate in the potential growth of the stock market while benefiting from professional management and diversification. They are a versatile investment tool suitable for various financial goals and risk profiles. To make the most of equity mutual funds, it’s essential to choose the right type of fund, conduct thorough research, and consider your investment objectives and risk tolerance. Additionally, understanding the taxation rules can help you optimize your returns from equity mutual funds. Always consult a financial advisor before making investment decisions to ensure they align with your financial goals and objectives.

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