What is Equity Mutual Fund?

In India, as per SEBI regulations, an equity mutual fund must allocate at least 65% of its assets to equities and equity-related instruments. These funds can be actively managed, where a fund manager makes investment decisions, or passively managed, like index funds and ETFs, which track specific market indices.

Equity mutual funds are categorized based on various factors:

• Market Capitalization: This refers to the total market value of a company’s outstanding shares. Funds can be categorized as large-cap, mid-cap, or small-cap, depending on the size of the companies they invest in.
• Investment Style: This refers to the approach used to select stocks. Common styles include growth, value, and blend. Growth funds focus on companies with strong growth potential, while value funds invest in undervalued stocks. Blend funds combine elements of both growth and value.
• Geography: Funds can be domestic, investing in Indian stocks, or international, investing in foreign stocks. International funds can further be categorized by region (e.g., emerging markets, European, or Asian) or country.
• Sector: Sectoral funds invest in specific sectors of the economy, such as technology, healthcare, or finance.

By understanding these categorizations, investors can select equity mutual funds that align with their risk tolerance, investment horizon, and financial goals.

What is an Equity Mutual Fund?

An Equity Mutual Fund is a professionally managed investment vehicle that pools money from multiple investors to invest primarily in a diversified portfolio of stocks with a minimum 65% of assets in equities and equity related instruments.

• Equity Mutual Funds are ideal investment for new to market investors who have not yet acquired the marker know-how or small individual investors.
• The diversification in equity Mutual Funds helps to mitigate risk, as not all stocks will perform well at the same time.
• By investing in an equity mutual fund, you gain exposure to a wide range of companies across various sectors, without having to invest directly in individual stocks.

Key Features of Equity Mutual Funds

• Diversification: Equity funds spread risk by investing in a variety of stocks, reducing the impact of a single stock’s poor performance on your overall investment.
• Professional Management: Experienced fund managers handle the selection, buying, and selling of stocks, leveraging their expertise to generate optimal returns.
• Liquidity: Investors can typically redeem their investments in equity mutual funds relatively easily, providing flexibility and access to their funds when needed.
• Potential for High Returns: Equity funds have the potential to deliver higher returns over the long term compared to other investment options like fixed deposits or debt funds. However, it’s important to note that this comes with higher risk.
• Types of Equity Mutual Funds: Equity mutual funds are categorized based on various factors, including investment objectives, market capitalization, and investment style. Here are some common types:

Based on Market Capitalization

• Large-Cap Funds: Invest in large, well-established companies with a significant market capitalization. These funds are generally considered less volatile and offer relatively stable returns.
• Mid-Cap Funds: Invest in medium-sized companies that have strong growth potential but may be more volatile than large-cap funds.
• Small-Cap Funds: Invest in small-sized companies with high growth potential. These funds are typically the most volatile but also offer the highest potential returns.

Based on Investment Style

Growth Funds: Invest in companies with strong growth prospects, often sacrificing current dividends for future growth.

• Value Funds: Invest in undervalued stocks that are trading at a discount to their intrinsic value.
• Balanced Funds: Invest in a mix of equity and debt instruments to balance risk and return.
• Sector Funds: Focus on specific sectors of the economy, such as technology, healthcare, or finance.

How Does an Equity Mutual Fund Work?

The Operation of Equity Mutual Funds involves several steps and aims for capital appreciation. The working of equity Mutual Funds is simple:

• Investor Investment(Unit Allocation): People buy units of a certain mutual fund scheme to invest in it.
• Fund Accumulation: The money from all investors who have bought units is gathered by the fund house, which is the organisation in charge of overseeing the fund.
• Investment in Stocks: The pooled funds are used to purchase a diverse portfolio of stocks by the fund’s portfolio manager, an experienced investment specialist. By distributing assets among numerous businesses and industries, this diversification seeks to lower risk.
• Portfolio Management: The manager of the portfolio keeps a close eye on the stocks’ performance. They might purchase new stocks, sell current ones, or change the proportions of various equities to better suit the fund’s investment goals when market conditions change.
• Valuation: The Net Asset Value (NAV) of the fund is determined every day. The market value of the fund’s underlying assets divided by the total number of outstanding units is known as the NAV. It gives a quick overview of the fund’s present worth.
• Redemption: By selling their units back to the fund house at the current NAV, investors can redeem their units whenever they choose.

How to Invest in Equity Mutual Funds

There are several popular methods to invest in equity mutual funds:

• Direct Plan: One kind of mutual fund scheme is a direct plan, in which investors buy units straight from the Asset Management Company (AMC) without going via brokers or distributors. This lowers the fund’s expenditure ratio by doing away with the requirement to pay a commission or distribution fee.
• Regular Plan: One kind of mutual fund scheme is a regular plan, in which investors buy units from a broker, distributor, or bank. These middlemen help and advise investors with choosing appropriate funds, filling out documentation, and overseeing their investments.
• Systematic Investment Plan (SIP): Investing a certain amount in a mutual fund scheme on a regular basis, usually once a month, is known as a Systematic Investment Plan (SIP).

How SIPs Can Drive Long-Term Wealth Creation

SIPs are a powerful tool for building wealth over the long term. By investing a fixed amount regularly, you can take advantage of rupee-cost averaging, which reduces the impact of market volatility. Additionally, the power of compounding can significantly amplify your returns over time. Using reliable SIP Calculator to plan investments effectively and see how small, regular contributions can grow into significant wealth over time.

The overall number of SIP accounts increased to an all-time high of 10.23 crore in November, 2024.

A Real-Life Example of Long-Term Wealth Creation with SIPs

• Let’s consider a hypothetical scenario:
• Monthly SIP Amount: ₹10,000
• Investment Period: 20 years
• Expected Annual Return: 12% (Historical average for good equity mutual funds)

Here’s how the investment would grow over time:

• Total Investment: ₹24,00,000
• Estimated Wealth: ₹99,91,479

Why should you invest in Equity Mutual Funds

Compared to direct stock investments, investing in Equity Mutual Funds has the following benefits:

• Greater Ratio of Risk to Reward:
  • Greater Risk: Equity investments are vulnerable to market swings, and they may see sharp short-term price swings.
  • Greater Reward Potential: Over the long run, stocks have historically fared better than other asset types like bonds and fixed deposits, providing the possibility of significant capital growth.
• Professional Management:
  • In order to choose equities that complement the fund’s investing goals, fund managers carry out extensive research and analysis.
  • They keep a close eye on market developments and modify the portfolio as necessary.
• High liquidity:
  • Usually, investors have a few working days to redeem their money.
  • Depending on the fund’s Net Asset Value (NAV) on the redemption date, the actual amount may differ.

Tax Implications of Equity Mutual Funds

Short-term capital gains tax will apply to investors who sell their equity mutual fund units within a year after purchase. This gain, is then subject to taxation at 20%

Long-term capital gains tax is applicable, if the investor keeps their investments for longer than a year. At the moment, long-term capital gains on equities mutual funds are subject to a flat 12.5% tax rate for gains over Rs. 1.25 lakh in a financial year.

Long-Term Capital Gains in Scenario Two

You would see a long-term capital gain of Rs. 20,000 if you sell your units after January 1st, 2025. Tax Repercussions: Tax-free gain up to Rs. 1 lakh. There is a 10% tax on excess capital gain over Rs 1 lakh.

Conclusion

For those looking to accumulate money over time, equity mutual funds have become a potent tool. These funds provide exposure to the growth potential of the equity markets through the investment in a diverse portfolio of stocks. They could therefore yield larger returns than conventional fixed-income investments.

It’s important to take into account aspects including the fund’s investment goal, expense ratio, and historical performance when investing in equities mutual funds. To choose funds that support their financial objectives, investors should also evaluate their investment horizon and risk tolerance. Diversification among various asset classes and funds can aid in risk management even more.

India has strong stock exchanges, such as the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), to make trading in equities mutual funds easier. By offering a venue for the purchase and sale of mutual fund units, these exchanges assist SEBI in maintaining the efficiency and transparency of the investing process.