I frequently get inquiries like what is equity mutual fund, after decreasing interest rates of the fixed deposits. If you are one of them, your concern is correct. Inflation is increasing with more speed than your money in fixed deposits.
So, it is always better to look for alternatives that can create wealth over the long term. Equity is a very good investment option. In India equity market has grown more than a CAGR of 12% in the last 40 years.
Doesn’t it look amazing and interesting to know about it after knowing its superb returns? We will see everything in detail on equity mutual funds.
By the end of the article, I am pretty sure that you will be crystal clear about equity mutual funds. Even you will start picking on your own, which equity fund is right for you.
So, What is an equity mutual fund?
First of all, you should be knowing what a mutual fund is. A mutual fund is a big pool of money collected from many investors like you. This money is invested in various assets like the equity market, debt market, and gold.
All the fund is managed by experienced fund managers. So, you get the benefit of their expertise, which you may not do on your own if you do not have an idea about it. Same way, an equity mutual fund is one type of mutual fund that makes a pool of money from many investors and invests in the equity market.
There are main 5 types of equity mutual fund is divided into many subtypes
In this type of equity fund, money is invested in only large-cap stocks. Large-cap stocks are those stocks that rank in the top 100 of all listed stocks on the stock exchange. All big companies like SBI, Reliance, TCS, HDFC Bank, and ICICI Bank, are large-cap stocks.
As the name suggests, they are large companies, so they provide better stability and lower risk. Lower risk comes with lower returns compared to small and mid-caps, because they are already too large, so they grow steadily over the years.
In this type of mutual fund, money is invested in companies that rank from 101 to 250 on the stock exchange. They have more room for growth and possibilities of becoming large-cap in the future.
They are more volatile and risky than large caps, and as they have more room to grow, they provide better returns with more risk than large caps.
Small caps funds invest in all small companies that rank beyond 250 on the stock exchange. They are small in size so they have maximum room to grow and provide superior returns over the years if they grow big in the future.
But as their size is small they face more challenges than large caps, that’s why they are highly volatile. This thing is highly risky for a short-term horizon.
In the worst phase, small-cap funds may even lose their capital by 30 to 50%. If your investment horizon is 10 to 15 years, then only you should invest in small caps. Because in an economic boom these stocks highly outperform large caps and provide you superior returns.
Multi cap funds
If you are not sure about your risk appetite, Then go for a multi-cap fund. As the name suggests, in this type of fund, your money is invested across all stocks like large, mid, and small caps. This fund is designed to get maximum benefit across all companies. It provides more balance against volatility.
These are very simple forms of equity mutual funds. If you see the news, you might have heard names like Sensex and nifty.
In this fund, your money is invested directly in the same stocks of Sensex or nifty index. So, you would get a similar return of what Sensex or nifty is growing. It is also not bad seeing the performance of Sensex over the past 40 years.
So far, I hope equity mutual fund meaning is clear.
What is equity in a mutual fund?
I think you might be having little idea that equity mutual funds mean mutual funds that invest in the equity market.
But what is equity?
In simple language, we can say equity means the value of stocks. In equity mutual funds, money is invested in the stock market. And as we know stock markets are subject to volatility risk in the short term.
But as time passes, the stock market performs better as the economy of the country grows. In the short term stock market remains volatile. You might already be aware of it. And this is the major fear among investors of losing their money.
Well, It is completely normal to have this fear, after all, you have worked hard and saved money, and you wish to grow it to fulfill your dreams in the future. But, if you see the long horizon of equity performance, it averages 12 % CAGR, which is way higher than inflation.
You should just pick your suitable equity mutual fund as per your risk appetite. For example, You can go with large-cap funds or multi-cap funds if you are not comfortable with equity market volatility and your investment horizon is small like 3 to 5 years.
There are many examples of best equity mutual funds for the long term. In this post I will not talk in detail about particular products but, personally, Axis blue-chip fund and SBI small-cap funds are my favorite funds for the long term.
So, go out and search for their long-term returns!
How does equity mutual fund work
Equity mutual funds are managed by professional fund managers. You can invest in equity mutual funds after completing your KYC. And If you do not know about it, then go through my post on how to do KYC.
Once your KYC is registered, you can either invest in a lump sum amount, with a minimum lump sum amount of 5000 rupees. Or you can start with a SIP of a minimum of 100 to 500 rupees in equity mutual funds.
Once you make the payment, you will be allotted a Folio number and mutual funds unit in it. Everyday value of those units will change as per the stock market volatility of the day.
But, I would highly recommend you stop seeing its daily value, once you start investing. It will help you make better returns in the future. You should just review the performance of your fund every 3 months or 6 months but not daily.
As I said before Equity mutual fund performance is good over the long term. Any type of mutual fund has the potential to make your money double in 3 to 7 years.
Are equity mutual funds safe?
Equity mutual funds are completely safe if you studied them properly before investment. If you ask about its regulatory safety, Equity mutual funds in India are managed by SEBI. SEBI has a very good reputation as a watchdog over the stock market and it is working very well to safeguard investors’ interests.
If you talk about the safety of mutual fund companies, you should start with good brand names, past performance, and fund managers. There are many top equity mutual fund brands in the market, like SBI, AXIS, HDFC, ICICI, and Nippon.
Even Though the past performance of an equity fund may not sustain in the future, it is good to check it to know the quality of the fund and fund managers. If you talk about safety against volatility, it is completely under your control, which fund you are picking as per your risk appetite and your investment horizon.
All about Equity mutual fund taxation
This is the last but important query about equity mutual funds. How equity mutual funds are taxed? From a taxation point of view, In every transaction of equity mutual funds, STT(Security transaction tax) is charged, which is 0.01%. You do not have to pay it directly.
Tax liability on capital gain on an equity mutual fund is divided into 2 types.
- Short-term capital gain tax: It is a 15% tax you have to pay on your capital gain if you are withdrawing an amount with gain in less than 1 year.
- Long-term capital gain tax: It is a 10% tax you have to pay on the capital gain if you are withdrawing an amount with a gain after 1 year.
In both cases, you are liable to pay tax only on the capital you gained above 1 lakh rupees. If your capital gain is less than 1 lakh rupees, you need not pay tax. The dividend gained by an investor on any mutual fund is tax-free in the hand of the investor.
You can also save your income tax by investing in an ELSS scheme of mutual funds and claim up to 1.5 lakh rupees in a year under section 80c of income tax. Now, a question may arise,
What is the difference between ELSS and equity mutual funds?
The full form of ELSS is an equity-linked savings scheme. It is just another equity mutual fund with the same investment strategy as an equity fund.
The only difference is it provides tax benefits under govt guidelines. To avail of it, all ELSS mutual fund scheme has a lock-in period of 3 years. In any case, you can not withdraw an amount from it within 3 years, while in other equity mutual funds you can withdraw your money at any time.
Equity mutual funds are very promising, safe investment options over the long run. Still, if you are new and uncomfortable with the volatility of equity funds, then start with liquid funds and later move to equity funds.
We have discussed almost everything you need to know before starting your investment journey. What do you think about equity mutual funds now? You can let me know in the comment or feel free to connect with me.