Equity Mutual Funds2019-06-25T11:34:16+00:00

Equity Mutual Funds


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WHAT ARE EQUITY MUTUAL FUNDS? HOW DO THEY WORK?

 

Equity Mutual Funds are essentially one of the highest-return funds in the mutual fund’s arena. These are funds which aim to yield the highest returns by widening the scope of investment via shares/stocks of various firms from a wide range of different market capitalisations. These firms provide the highest returns in the market, even higher than debt funds and fixed deposits. How a particular fund performs is entirely dependent upon the company’s performance results of profit and loss. This is the baseline for seeing how much a particular investor will make.

Basically, in Equity Funds, over 60-75% of the investments of the portfolio are made in the equity shares of companies of varying kinds. These funds are famous for high returns in a medium-long term period of the investment horizon. These funds are risky and volatile as most of the investments in the share market in the initial stages accounting to frequent market fluctuation. However, in the long run, they are one of the safest and high-result yielding funds.

Once, the major part of the investment has been allocated to the stocks of a variety of companies, the rest of the investment pool is invested in debt instruments and money market. This is done in order to reduce the risk factors involved with stocks and also to help account for stability in case of sudden redemption requests. Ideally, equity funds are appropriate for investors whose investment horizon is 5 years or more.

TYPES OF EQUITY FUNDS

 

The classification of equity funds is based on three factors:

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Sector/Themes Based

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Market Capitalization

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Investment Style

  • Sector and Themes Based

  • These kinds of funds tend to involve a high risk-factor since their focus is in one particular sector or theme. The performance of such funds could take a hit due to the market as well as sectoral performance issues. The Sector funds, on the other hand, can be diversified based on market capitalization.

  • Market Capitalisation

  • Market Capitalisation, more commonly called market cap is essentially the value of total shares of the organizations. Market Cap = Number of Outstanding Shares x Stock Price Per Share. In accordance with the same the public companies with stocks and shares to offer are categorized as follows:

    Large Cap Equity Funds: Well Established Companies having stable and reliable investment schemes because of the large capitalisation size.

    Mid and Small Cap Funds: Investment portfolio is diversified into small and mid-cap size firms

    Small-Cap Funds: These funds are of small-cap companies and they deliver highly fluctuating results owing to the volatility of their market performance.

    Multi-Cap Funds: Investment across a wide variety of Market Capitalisations meaning Large-Cap, Mid-Cap and Small Cap Stocks is termed as a multi-cap fund.

  • Investment Style

  • The funds described above have an active investing style which basically means that the manager of the fund is in charge of deciding the composition of the portfolio. There are, however, funds whose portfolio compositions mimic a specific index.

    Equity funds following a particular index are termed as index funds. These index funds are basically passively managed funds which invest in the same companies in the exact same proportions. Index funds are essentially low-cost funds since there is no fund manager looking over the activities and portfolio composition.

SHOULD I INVEST IN EQUITY SCHEME MUTUAL FUNDS?

 

In order to ascertain whether you should invest in Equity scheme at all depends upon a variety of factors. The pivotal factors which should motivate your decision are your willingness to take risk or risk appetite and investment horizon i.e. the amount of time you need to invest for. As a rule of thumb, Equity schemes are suitable for investors who wish to invest for a period of more than 5 years.

Short-Term investors might struggle to find any joy in equity schemes owing to market instability and fluctuations. If Tax-saving is the objective of investment, then an ELSS scheme might be better for you. Budding Investors could go large-cap equity funds as they give stable returns in the long run. Experienced investors could, however, go for more diversified equity to enjoy the best results via risk and assured returns.

THINGS TO KNOW BEFORE INVESTING

 

Fund Objectives

The best equity funds target the highest wealth accumulation owing to a robust investment strategy. There are generally two styles on which the stock picking is based which are Value Investing or Growth Investing. Value Investment is basically investing in undervalued stocks whose price is bound to rise in the future leading to eventual profit. Growth Investing is basically creating a portfolio of the most well-performing stocks.

Types of Fund

Equity funds are in themselves of varying kinds and an investor can pick out the best for themselves by taking a look at the fund objectives and whether they align with the financial goals or not. In accordance with the same, equity funds are Large-Caps/ Mid-Caps/Small-Caps. Small and Mid-Cap Funds are generally high-risk and High-Return potential in comparison to large-caps. Additionally, there are multi-cap funds, these are those which facilitate investment across a wide range of market capitalization.

Risk

Equity funds like all mutual fund Investments are “subject to market risk”. What this basically means is the stocks that the mutual fund has invested in are due for rising and fall as per their performance and are not always risk-free. In case of equity funds, these are generally affected by the underlying benchmarks such as Sensex or Nifty. Overall rises and falls of these indices lead to fluctuation in the value of the equity funds which have invested in them. The volatility of the market is more impactful on equity funds is higher than debt funds or money market funds.

Cost

The Equity Mutual Funds charge an expense ratio in order to manage your money. The Securities Exchange Board of India (SEBI) has set the limit of expense ration to be 2.5 %. Equity Funds managed actively have higher expense ratios in comparison to Index Funds.

Investment Time

As mentioned above, equity mutual funds are suitable for individuals who have long-term investment plans as the results of market fluctuation are normalized over a longer time-period. The returns of the funds reach a meagre 10-12% in a time period of 6-7 years. In order to help the funds realize their full potential, investors need to be patient and be a long-term investor.

Financial Goals

Equity Funds are for investors who are in it for the long-haul and are looking to initiate financial goals like wealth creation or retirement planning. It might also help you create wealth to quit a job earlier/retire and pursue a hobby/passion as a career move

WHICH EQUITY FUND SHOULD I PICK?

 

Once, you have determined that you want to go ahead with investing in equity fund you need to pick out a fund which will justify and help you achieve the financial objectives you have set out as an investor. The factors which will play a role in the same are as follows:

  • Fund Returns

  • One of the pivotal factors for evaluating the/ranking/selection of a particular equity fund is the performance of the fund with regards to returns on investment. In order to truly evaluate the performance of a particular fund, investors should consider the returns of the fund over a time span of 5-10 years. It is good practice an investor to select the funds which have consistently beaten their benchmark indices. Benchmark indices are essentially an index to which the fund’s returns are compared). In addition to this, their returns should also fare well against their competitor funds.

  • Fund History

  • A trusted fund coming from a strong parentage of financial institutions issuing the equity fund units. The investors should have absolute trust in the asset management company that they allow them to manage their hard-earned money for them. Ideally, funds form a well-established firm with a long history of business, at the very least 5 years and more. This essentially says that the fund and the management company has gone through the market cycles of slump and rally.

  • Expense Ratio

  • The expense ratio is essentially the annual expense by funds which is expressed as a percentage of the average net asset. The expense ratio basically is the charge mutual fund investors are charged for their asset management and investing on their behalf. Direct mutual funds charge the investors with lower expense ratios as compared to the Regular Mutual Funds. This will help you to cut down on Distributor commissions.

  • Financial Ratio

  • As every investor is clearly made aware that ‘mutual fund investments are subject to market risks an investor has to factor in all the ratios involved with a particular fund. One of these factors is the Risk-Return Ratio becomes a pivotal factor for institutions. In addition to this, the Sharpe Ratio ( the Risk-Adjusted Returns of A Fund) also is a healthy indicator of the fund’s performance and return capabilities. Essentially, this ratio represents the extra returns given by a particular fund over the returns of a risk-free financial institution. Higher the Sharpe Ratio, higher the risk-adjusted returns of the particular fund.

EQUITY MUTUAL FUNDS: FEATURES

 

Here are some of the salient features of the Equity Mutual Funds:

  • Section 80C Exemption
  • Equity Linked Savings Schemes or ELSS is among one of the only tax-saving investment schemes under the provisions of the section 80C of the Income Tax Act. This scheme also gives you equity exposure (in addition to NPS). These schemes have one of the lowest lock-in periods of 3 years and with high return potential, these schemes have an exceptional track record. These schemes can be invested in by the provision of SIP or Systematic Investment Plan or lump sum amount.

  • Cost of Investment
  • In case there is a frequent buying and selling of equity shares, this often impacts the expense ratio of equity funds. SEBI has fixed the upper limit of the expense ratio at 2.5% for equity funds however, there are plans in order to reduce the limit further. A low expense ratio translates as high return for the investors.

  • Holding Period
  • When the redemption of units of equity funds is done, you earn capital gains. In your own hands, the capital gains are taxable and the rate of taxation depends upon the time period of investment n the equity funds scheme. This period of being invested in the equity scheme is termed as the holding period.

  • Cost Efficiency and Diversification
  • Even a Nominal investment in the equity funds, you can get exposure to a wide variety of stocks. For example: if you have 2,000 Rupees to invest, when you go to invest in stocks, you will be able to purchase 1 stock of a large-cap company or 2-3 stocks of a mid-cap company. This, however, will expose your portfolio to a lot of concentration risks. The same amount, however, if invested via Equity Funds will expose your capital to a wide range of high-return stocks allowing you to diversify and benefit from investments in a fruitful fashion.

TAXES ON EQUITY FUNDS

 

Whenever you redeem the units of mutual funds you have acquired, you gain the money these units are worth and this process is termed as a capital gain. Under mutual funds, capital gains earned on a holding period of up to 1-year are called Short-Term Capital Gains (STCG). STCG have a 15% taxation rate. Capital Gains earned on holding period greater than 1 year are called Long-Term Capital Gains. In 2018, a regulation was passed which taxes the LTCG in excess of Rs. 1 lakh will be taxed at 10% excluding the benefit of indexation.

BENEFITS OF INVESTING IN EQUITY MUTUAL FUNDS

 

BEST EQUITY FUNDS IN INDIA

 

We have looked at a variety of features and considerations, quantitative, as well as, qualitative parameters that need to be observed while investing in Equity Mutual Funds in India. Here, we present to you the top 6 equity funds across the country yielding high returns and having good financial ratios. We also enlist the 3 years and 5-year returns of each fund.

Note: The ordering of funds is not a suggestion for picking/not picking a fund and is not a ranking system. The returns are always subject to change according to the performance of the fund.

 

Equity Fund Name3-year returns5-year returns
SBI Magnum Multi-Cap Fund Regular Growth10.44%21.65%
ICICI Prudential Bluechip Fund Growth11.44%15.52%
Aditya Birla Sunlife Frontline Equity Fund Growth10.24%14.44%
Mirae Asset India Equity Fund Regular Growth13.96%18.65%
SBI Bluechip Fund Regular Growth8.76%15.52%
L&T India Value Growth10.44%21.65%