Equity mutual funds are a category of mutual funds primarily focused on investments in equities, or stocks. These funds aim to provide investors with exposure to the broader equity markets, allowing them to participate in stock market without the need for direct stock selection. Equity mutual funds offer a versatile range of investment options, spanning various market capitalizations, sectors, geographical regions, and investment styles to accommodate different investor risk appetites and objectives.

One of the key advantages of equity funds is their professional management. Experienced fund managers leverage their research and expertise to construct diversified portfolios of stocks, with the goal of generating returns. These managers actively monitor and adjust the portfolio in response to changing market conditions. Let's delve deeper into the meaning and attributes of equity mutual funds.

What Are Equity Mutual Funds?

Equity funds are mutual fund schemes that primarily channel their investments into stocks of publicly listed companies, spanning a wide array of sectors and industries. An equity mutual fund scheme should invest at least 65% of its assets in equities according to SEBI (Mutual Fund) Regulations. These funds are further categorized based on the types of stocks they invest in and their specific objectives. The selection of stocks within these funds is conducted by fund managers and their teams, who employ comprehensive research and analysis to identify companies with strong growth potential and the ability to outperform broader market benchmarks.

Also Read What is Mutual Fund?

Types of Equity Mutual Funds

Equity mutual funds encompass various subcategories, each designed to cater to distinct investment needs:

1. Multi cap Fund: Multi cap funds allocate a minimum of 75% of their investment in equity & equity related instruments - 75% of total assets with 25% each in large, mid and small cap.

2. Large Cap Fund: Large cap funds invest 80% or more of their assets in large cap stocks.

3. Large & Mid Cap Fund: Large & midcap funds invest at least 35% each in large and mid cap stocks.

4. Mid Cap Fund: Mid cap funds allocate 65% or more of their assets to mid cap stocks.

5. Small Cap Fund: Small cap funds invest 65% or more of their assets in small cap stocks.

6. Value / Contra Fund: These funds base a minimum of 65% of their investments on value/ or a contrarian strategies.

7. Dividend Yield Fund: These funds allocate 65% or more of their assets to dividend yield stocks.

8. Focused Fund: Focused funds invest in a maximum of 30 stocks within the equity asset class.

9. Sectoral / Thematic: These funds allocate 80% or more of their assets to specific sectors or themes

10. ELSS or Tax Saving Mutual Fund: ELSS funds invest a minimum of 80% in equity, (accordance with Equity Linked Saving Scheme, 2005 notified by Ministry of Finance). They have a 3-year lock-in period.

Large cap stocks represent the top 100 stocks ranked by full market capitalization, mid-caps encompass the 101st to 250th stocks, and small caps include stocks ranked 251st and beyond, with the average full market capitalization of the previous six months serving as the criterion.

Why Should You Invest in Equity Mutual Funds?

Investing in equity mutual funds offers several advantages:

1. Potential for Inflation-Beating Returns: Historically, equities have delivered returns that outpace inflation over extended investment horizons. Equity funds enable investors to participate in this growth potential by investing in a diversified portfolio of quality stocks, aiming to generate returns that surpass fixed-income options.

2. Power of Compounding: Equity funds harness the power of compounding, where returns are reinvested and multiply over time, leading to exponential wealth growth. Starting early allows investors to leverage this wealth creation concept.

3. Affordable Investments via SIP: Equity funds make it accessible for small investors to enter the equity market through Systematic Investment Plans (SIPs), with monthly investments as low as Rs 500-1000. SIPs encourage disciplined and regular investing over time.

4. Professionally Managed: Equity funds relieve investors of the complexity of stock selection and portfolio management. Experienced fund managers conduct thorough research and analysis to construct diversified equity portfolios aligned with the fund's objectives.

5. High Liquidity: Most open-ended equity funds offer high liquidity, allowing for easy redemption. With the exception of ELSS funds, which have a 3-year lock-in period, other equity funds can be redeemed at any time, with proceeds credited within 2-3 business days, facilitating the meeting of unforeseen financial needs.

6. Regulated and Transparent: Equity funds, regulated by SEBI, adhere to strict disclosure requirements, encompassing portfolio holdings, costs, financials, performance, fund managers, and more. This transparency ensures governance and investor protection, instilling confidence in investing with credible fund houses rather than directly in stocks.

Who Should Invest in Equity Mutual Funds?

These funds are ideal for investors who want to grow their portfolio and potentially earn inflation-beating returns. It is recommended to have an investment horizon of 5-10 years or longer to get the most out of your investments. This allows you to ride through market volatility and benefit from the long-term compounding effect on your investments.

The best thing about equity funds is their versatile nature. Investors can find an equity fund that best suits their goals and invest accordingly. So, identifying the right equity fund and investing in it can be one of your wisest investment decisions ever.

Taxation on Equity Funds

Regarding taxation, equity funds are subject to the following rules:

On Redemption:

• For investments held for less than 12 months, Short-Term Capital Gain Tax applies at a rate of 15% (plus applicable surcharge and cess) on any gains/profits.

• Investments held for more than 12 months are subject to Long-Term Capital Gain Tax at a rate of 10%, without indexation (plus applicable surcharge and cess), provided the gain in a financial year exceeds Rs 1 Lakh. Cumulative long-term capital gains on equity and equity-oriented funds up to Rs 1 Lakh in a financial year are not taxable.

On IDCW (Income Distribution Cum Capital Withdrawal):

• Any income received under this option is considered income for investors and taxed at applicable tax slab rates.

In summary, equity mutual funds could be a good choice for investors aiming to achieve long-term wealth accumulation and potential growth, rendering them a valuable asset within diversified investment portfolios.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.