What is an Equity Fund – Features, Types & Benefits of Equity Fund

Mutual funds’ primary differences begin with equity and debt. While both these kinds of funds form the two extremes of investing in mutual funds, it is essential to understand them in detail. This piece entails the details on equity funds and all the details an investor needs to know before investing in them. 

What are Equity Funds?

An equity fund is a type of mutual fund that primarily invests in companies’ stocks (equities). It is designed to provide investors with long-term capital appreciation by investing in various equity securities. The focus of equity funds varies, such as large-cap, mid-cap, small-cap stocks, or a combination of these, offering an investor the opportunity to gain exposure to the stock market while diversifying their investments.

Equity funds are usually managed by professional fund managers who actively or passively manage the portfolio to achieve the fund’s investment objectives. The main objective is to maximize returns by capitalizing on the growth potential of stocks.

Features of Equity Mutual Funds

The primary features of equity mutual funds are:

• High Return Potential – Equity funds come with greater returns. 
• Risk and Volatility – They are known to be highly risky compared to other funds. 
• Professional Management – Equity funds are managed by experienced professionals who conduct research, analyze market trends, and make informed investment decisions to maximize returns while managing risk.

Types of Equity Mutual Funds

There are several kinds of equity mutual funds every investor needs to know about:

Huge Caps Funds: Huge-cap investment pools of Indian finance commit investments in large, known establishments that have a market value in terms of capitalization of above ₹20,000 crores. These are stable ones, and they have records for performance. Huge-capital funds are less volatile; nonetheless, growth potential may be at its lowest.

Mid-cap Funds: These funds concentrate on companies with a market capitalization between ₹5,000 crores and ₹20,000 crores. These companies are usually in the growth phase, offering higher growth potential but at the cost of increased risk.

Small-cap funds: This category invests in smaller companies that have a market capitalization of less than ₹5,000 crore. These are risky funds with the highest potential for growth but with higher volatility and uncertainty because they relate to smaller companies.

Sectoral Funds: Sectoral funds focus on a particular sector of the economy, like technology, healthcare, or energy. Such funds may offer a better return if the selected sector performs well, but they are more vulnerable to sector-specific risks.

Thematic Funds: Thematic funds usually focus on investment themes, including environmental sustainability, infrastructure, and emerging markets. Their returns, based on a successful theme, can offer high rates of return, though the reverse is true where risks tend to be great if the theme does not take off as expected.

Index Funds: These funds try to mirror the performance of a given market index, like Nifty 50 or Sensex. An index fund tracks the index passively and thus is known to offer low-cost exposure to the broader market with generally lower risks than that offered by actively managed funds.

Each kind of fund comes with varied characteristics, and it is essential to understand each of them. 

How Does an Equity Mutual Fund Work?

An equity mutual fund operates by pooling money from different investors in order to create a diversified portfolio of stocks. The fund manager selects stocks that will be included in the portfolio based on the fund’s investment objectives and strategy.

Units or shares in the mutual fund are purchased by investors through an equity mutual fund. The NAV is the price for determining the value of the units, which equates to the total value of all the assets minus liabilities and divided by the number of outstanding units. When stocks within the portfolio appreciate or depreciate, so does the NAV, mirroring the worth of the investments.

Why Invest in an Equity Mutual Fund?

The perks of investing in equity mutual funds are listed below:

• They offer long-term growth for the investors.
• They can give you diversification amongst various investments.
• Just like other mutual funds, equity funds come with the benefit of professional management and expertise. 
• Equity mutual funds enable investors to invest in the stock market with relatively low amounts of investment, thus providing a cost-effective means of access to a diversified portfolio. 

How to Invest in an Equity Mutual Fund?

The steps you need to follow in order to invest in equity mutual funds are:

Step 1: You can invest in equity mutual funds directly through the fund house by visiting their website and completing the registration and KYC (Know Your Customer) process.

Step 2:  Most online brokers and investment platforms provide a variety of mutual funds. Once you create an account and complete KYC, you can invest in several equity funds according to your preference and financial objectives.

Step 3:  SIP allows investors to invest a fixed amount regularly (monthly or quarterly) in an equity mutual fund. SIPs help average the cost of investment, mitigating the impact of market volatility and encouraging disciplined investing.

Step 4: It is possible to invest a large amount of money in an equity mutual fund. This process requires more careful market timing but can be beneficial if the right time is chosen while investing.

Taxation of Equity Mutual Funds in India:

1. Short-Term Capital Gains (STCG): If you sell equity mutual fund units within one year of purchase, the gains are considered short-term. STCG is taxed at 15%.
   
2. Long-Term Capital Gains (LTCG): If you hold the units for more than one year, the gains are considered long-term. LTCG is taxed at 10% on gains exceeding ₹1 lakh in a financial year.
   
3. Dividend Taxation: Dividends received from equity mutual funds are now taxed as regular income in the hands of the investor, according to their individual income tax slab. The Dividend Distribution Tax (DDT) regime has been abolished. The fund house does not deduct tax at the source from dividends.

Conclusion

Equity mutual funds are a good choice for investors who are looking for long-term growth and are willing to accept market volatility. They provide a balanced approach by investing in a diversified portfolio of stocks, making them suitable for investors with a higher risk tolerance. With professional management and the potential for high returns, equity funds are a great way to gain exposure to the stock market. Investors should carefully assess their risk profile and investment goals before investing in equity mutual funds.

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