Equity funds, which primarily invest in equities, are sometimes also known as stock funds. They invest the money collected from various investors from varied backgrounds in different firms' shares/stocks. The profits and losses connected with these funds are decided by how the invested shares perform in the concerned stock market (price increases or decreases). Furthermore, equity funds have the potential to earn considerable long-term gains. As a result, the risk associated with these funds is also significantly larger.

What is an Equity Fund?

Equity mutual funds attempt to generate significant returns by investing in the stocks of firms with a wide range of market capitalisations. Because equity mutual funds are the riskiest type of mutual fund, they have the potential to outperform debt and hybrid funds in terms of returns. The success of the firm has a substantial impact on the returns of investors.

How Do Equity Funds Function?

Equity funds invest at least 60% of their assets in various firms' equity shares in appropriate proportions. The asset allocation will be consistent with the investment goal. Depending on market circumstances, asset allocation might be done entirely in large-cap, mid-cap, or small-cap enterprises stocks. The investment style might be either value or growth-oriented. After allocating a considerable part to equities, the remainder may be invested in debt and money market instruments. This is to deal with unexpected redemption requests while also lowering the risk level to some extent. The fund manager makes purchasing and selling choices to capitalise on shifting market movements and maximise profits.

Characteristics of Equity Funds

Cost of Investment

The frequent selling and buying of equities shares significantly influence equity fund cost ratios. The Securities & Exchange Board of India has set the fee ratio for equity funds at 2.5%. Lower expenditure ratios result in greater returns for investors.

Holding Time Period

When investors redeem their fund units, they realise capital gains. In the hands of investors, capital gains are taxed. The rate of taxes is determined by the length of time invested, which is referred to as the holding period. Short-term equity assets are those that have been held for less than one year, & short-term financial gains are taxed at 15%. Long-term equity holdings last more than a year, and long-term capital gains are taxed at 10% if they surpass Rs 1 lakh per year.

Cost-cutting and diversification

Investing in equity funds may expose you to a variety of stocks while just investing a small amount. Your portfolio, however, will be in danger of concentration.

Equity Fund Types

The types of Equity Funds are classified based on their investment mandate as well as the equities and sectors in which they invest.

Sector and theme-based

This category includes equity funds concentrating their assets on a certain sector or subject. For example, sector funds make investments in a certain industry, such as FMCG, pharmaceuticals, or technology. Thematic funds specialise in one area, such as emerging consumer firms or overseas stocks. Sector and thematic funds are riskier since they focus on a certain industry or subject. This is due to the fact that their performance is subject to both sectoral and market risks. However, in terms of market capitalization, industry and theme funds can be diversified.

Market capitalisation

Large-cap equities mutual funds:

Large-cap corporations are well-established, and hence large-cap funds may provide consistent returns.

Mid-cap equities mutual funds:

These funds make investments in medium-sized businesses. Mid-cap equity funds are less stable than large-cap equity funds.

Small and mid-cap funds:

These funds have the potential to provide substantial returns by investing in both mid-cap and small-cap funds.

Small-cap mutual funds:

These funds invest in small-cap mutual funds. Investors should be aware that small-cap funds are more susceptible to market volatility and risk.

Multi-cap mutual funds:

Multi-cap funds invest in equities with a wide range of market capitalisations. The fund management selects to invest primarily in a specific capitalization depending on the market conditions.

Depending on Investment Style

All the funds described above adhere to an active investment strategy, in which the fund manager determines the portfolio composition. There are, however, funds whose portfolio composition is modelled after a certain index. Index funds are equity funds that track a certain index, such as the Sensex. These are passively managed funds that invest in the same firms in the same amounts as the index the fund is based on.

Equity Fund Performance in India

Equity funds outperforms all other types of mutual funds in terms of returns. Equity funds have produced average returns ranging from 10% to 12%. The rewards vary according to market movement and overall economic conditions. To get the expected returns, you must carefully select your stock funds. To do so, you must closely monitor the stock market and be knowledgeable about both quantitative and qualitative elements.

Who Should Invest in Equity Funds?

For aspiring investors

Large-cap equity funds may be the path to go if you are a prospective investor looking for stock market exposure. These funds invest in equity shares of top-performing firms with low risk. In addition, well-established firms have consistently generated consistent returns over a lengthy period of time.

For astute market participants

If you understand the market pulse and are ready to accept reasonable risks, you should consider investing in diversified equities funds. These invest in stocks with a range of market capitalisations. When compared to equity funds that solely invest in small/mid-cap stocks, these funds provide an outstanding combination of high returns and lower risk.

Advantages of Investing in Equity Funds

There are several advantages to investing in mutual funds:

• Professional money management
• Low Price
• Convenience
• Diversification
• Investing that is systematic
• Flexibility
• Liquidity

The main advantage of investing in equity funds is that anyone doesn't have to worry about selecting businesses and sectors to invest in. However, successful equities investment necessitates extensive study and understanding. Before you decide to invest, you must first comprehend and analyse a company's performance. You must also grasp how a certain industry is anticipated to fare in the future. Of course, all of this takes a lot of effort and time, which most people lack. As a result, investing in an equity mutual fund allows you to delegate stock selection to an expert fund manager.

Taxation of Equity Funds

As previously stated, short-term financial gains are taxed at a rate of 15%. The long-term capital gains tax on equities holdings was reinstated in the Union Budget 2018-19. It is applied at a 10% rate if the gains surpass Rs 1 lakh per year.

Difference between SIP and Lumpsum

Systematic Investment Plan (SIP)

A SIP enables you to invest a certain amount over time. SIPs can be scheduled weekly, monthly, or quarterly. You give the fund firm permission to debit the investment from the bank account. SIPs have the advantage of rupee cost averaging. This implies that when markets are strong, you will be given fewer units. You may obtain more units for the same price when markets are low. This allows you to invest at various market levels. SIPs also instil financial discipline & make mutual funds more accessible to everybody.

Lump-sum

Individuals with large money to invest might explore lump-sum investments. However, hardly many investors invest in lump sums.

Conclusion

Investing in these funds can claim tax exemptions of up to INR Rs. 1.5 lakh every fiscal year u/s 80C of the IT Act. However, these funds are subject to a three-year lock-in term. These are the most common forms of equity mutual funds.

Because the majority of these funds invest primarily in large corporations, the risk level is low, and the return potential is moderate. In addition, because these funds are less hazardous and provide an additional tax advantage on investment, they are typically recommended to new investors who are just beginning their financial adventure. For any legal assistance, contact Online Legal India.