What are Equity Funds?

Equity Mutual Funds are a type of mutual fund scheme that invests their investments in shares/stocks of various firms, to achieve higher returns. Equity-oriented funds invest at least 65 percent of the corpus, as governed by SEBI, in equity-related instruments. Compared to debt funds, these funds are expected to produce higher returns but are riskier because they rely on market conditions. The business performance of the underlying companies plays a key role in determining the return to investors.

Types of Equity Funds

Equity Funds are categorized based on different parameters as explained below in detail-

1.) Based on market capitalization

Large Cap Funds -

Large Cap mutual fund schemes refer to funds that invest at least 80 % of the total assets in the shares of large-cap firms, i.e. the top 100 firms, in terms of market capitalization. These funds are also known as 'Bluechip funds'. This term is derived from the poker game wherein blue chips are kept for the largest number on the table. BlueChip companies are likewise well-established enterprises with the highest market shares and more stable earnings.

Mid-Cap Funds -

Mid-cap mutual fund schemes are identified to be open-ended equity funds investing a majority of their gross assets in equity and equity-related instruments of mid-cap firms. These companies have generally been operating for quite some time and have a good track record as well. The well-managed and more successful companies would be expected to inevitably transform into large-cap companies eventually. This makes the mid-cap market an interesting chance for growth opportunities with managed obstacles.

Small-Cap Funds -

Small Cap mutual funds refer to mutual funds that invest primarily in companies ranked below 250 in terms of market capitalization. These funds invest in equity & equity-related instruments of smaller firms, which include start-ups or small income-generating businesses with a good business strategy and potential for success. At least 65 percent of the cumulative funds are invested in small-cap equity and the balance will be invested in some of the large or mid-cap ones along with debt instruments.

2.) Based on Investment Style

Active Funds - These schemes are professionally managed by the fund managers who carefully select the stocks that they'd like to invest in.
Passive Funds - Typically, these funds track a market index or division that specifies the list of stocks in which the scheme will invest. In these schemes, there is no active role for the fund manager in the decision of stocks.

3.) Based on Investment Strategy

Thematic and Sectoral Funds - An equity fund may adopt a particular theme of investment, such as an international stock theme or an emerging market theme, etc. Any schemes may also invest in a specific market area, such as BFSI, IT, pharmacy, etc. It is worth noting that sector or theme-based funds bear a higher risk when they concentrate on a single sector or theme.
Focused Equity Funds – These funds invest in a restricted number of stocks, normally between 20 and 30 stocks. The objective of these funds is to generate higher returns by taking advantage of the higher concentration. However, on the flip side, these funds also carry a higher level of risk due to a lack of diversification.
Contra Equity Funds - These schemes pursue a contrarian investment approach, as the name implies. To recognize underperforming stocks and buy them at low prices, these schemes evaluate the market, predicting that these stocks can stabilize in the long run.

4.) Based on tax treatments

ELSS - The only equity scheme that provides tax advantages of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act is the Equity Linked Savings Scheme (ELSS). These schemes invest at least 80% of their net assets in securities and equity-related instruments. In addition, these schemes have a duration of lock-in of 3 years.
Non-Tax Saving Funds - Apart from ELSS, all equity funds are non-tax-paying schemes. This means that the returns are liable to tax on capital gains.

Who should invest in equity funds?

Those investors must invest in Equity Funds that are capable of coping with a reasonable amount of risk and volatility with a higher return opportunity. Risk-averse investors and investors who do not expect capital gains typically do not opt for these securities, so instead they invest in debt mutual funds, which are safer and relatively less volatile but have traditionally yielded much lower returns.

Benefits of Equity Funds

High Returns - Equity Mutual Funds are recognized for accruing higher returns than debt funds. Inflation-beating returns have always been delivered in the long term by investments directed towards equities, according to historical returns. The investment valuation displays immediate appreciation when the stock price rises.
Diversified portfolio: Investing in an equity mutual fund scheme ensures that, through the company's various strategies, trends, markets, etc., the owner can own a large range of stocks and shares in different firms. Holding a wide range of stocks in one's portfolio ensures that there are no huge losses that can not be compensated for by gains in another segment of the portfolio.
Lower Expense Ratio: Regular purchase and sale of shares in an Equity Fund will lead to a rise in the cost ratio of the scheme. An upper limit for the cost ratio of equity funds at 2.5% has been established by the Securities and Exchanges Board of India (SEBI). SEBI might reduce this even further. For investors, this implies more returns.
Tax Exemption under Section 80C: Tax exemption under Section 80C of the Income Tax Act with equity exposure is offered by the Equity Linked Savings Scheme or ELSS. It has a small 3-year lock-in span and provides tremendous opportunities for positive returns to be made. Investors also could invest in an ELSS in installments.
Liquidity: Stocks and shares become traded regularly through the global financial markets. Although the liquidity available is not instantly as liquid as the withdrawal of funds from a savings bank account, it is considerably better than that provided by most other mutual fund schemes or investment plans.

Taxation of Equity Mutual Funds

The capital gains are considered Short-Term Capital Gains (STCG) if the units of the scheme are held for less than one year. These Capital gains are taxed at 15 percent on redemption.

In case the units are held for more than 1 year from the date of purchase, the gains are deemed as Long-Term Capital Gains (LTCG). A tax of 10% is levied on these gains without the advantage of indexation. However, LTCG up to Rs. 1 lakh in a financial year are exempt from tax.

How to Invest in Mutual Funds?

Just like every other investment decision, before signing the dotted line, you must properly determine your financial goals, risk tolerance, and investment horizon.

You can easily start investing in mutual funds through the Best mutual fund app the ZFunds App available on the Google Play Store.

Steps

Download the ZFunds App from the Play Store.
Select the “New User” option after opening the app, and enter your “Full Name” & “Mobile Number”. Click “Submit”.
ZFunds homepage will be displayed on your screen showing different types of mutual funds & their categories.
Select the “Please complete your profile” option appearing at the top of your screen. There, you would have to complete the KYC process if you haven’t done it already.
Enter your “PAN Card Number” & “Date of Birth” to check the KYC Status, if it is done already then you don’t need to do it again.
If KYC not registered, then you will be redirected to a page for filling KYC Information.
After that, You will be asked to enter information like your Name, Gender, Marital Status, Father’s Name, Mother’s Name, Income Range, Mobile Number, Occupation, and other demographic details. Also, you will have to enter your Address(As per ID proof) along with Pincode.
After filling in the information, you have to upload the following pictures :
Your Signature (as on PAN Card)
Adhaar Card or any other ID proof.

Then Click Next.

After that, you will need to enter your Bank account details i.e Your Bank Account no., Bank IFSC Code & MICR Code.
Tick the “I want to add a nominee” option if you want to add a nominee. Otherwise, leave it blank.
Then click “Finish”.
After that, you can choose from different mutual fund schemes to invest as per your needs & requirements.

You will receive a confirmation message & a mail, once all your documents are verified & KYC gets approved (For Non-KYC registered users). Also, you will receive confirmation regarding your investments in mutual fund schemes along with the status of the allotment of units.

Frequently Asked Questions (FAQs)

1. Is ELSS a type of Equity Fund?

Yes, ELSS is a type of Equity Fund.

2. Does Equity Fund offer good liquidity?

Yes, Equity Funds offer good liquidity.

3. Can one apply for Equity Funds online?

Yes, investors can choose to invite online as well.

4. What are Equity Funds?

Equity Mutual Funds are the type of mutual fund schemes that invest their investments in shares/stocks of various firms, with the goal of achieving higher returns.