What are Equity Mutual Funds?
Equity Mutual Funds invest mainly in stocks, aiming for high returns by benefiting from company growth. They pool money from multiple investors, providing access to a diversified portfolio managed by experts. These funds are ideal for long-term goals, usually over five years. SEBI rules require equity funds to invest at least 65% of their assets in equities. These funds can offer higher returns than fixed-income options but also carry higher risks due to market volatility.
Features of Equity Mutual Funds
- Equity funds reduce the risk associated with individual stocks by investing in a wide range of stocks across various sectors.
- Fund managers with expertise and experience in managing equity funds aim to maximise returns.
- Equity funds can offer significant returns, especially in a bullish market, but they also come with the risk of losses in bearish markets.
- These funds come in various forms, such as large-cap, mid-cap, small-cap, and sector-specific funds.
- Equity Mutual Funds offer high liquidity, making them accessible for investors who need flexibility.
List of Equity Mutual Funds
Here's a list of some top-performing equity mutual funds, along with their expense ratios and 5-year returns:
Types of Equity Mutual Funds
- Large-Cap Funds: Invest in large, well-established companies that are typically leaders in their industry. They offer stable returns with relatively lower risk.
- Mid-Cap Funds: These funds invest in medium-sized companies with high growth potential. They are riskier than large-cap funds but can offer better returns.
- Small-Cap Funds: These funds invest in small-size companies with the potential for significant growth. They are high-risk, high-reward funds.
- Multi-Cap Funds: These funds invest in large, mid, and small-cap stocks, providing balanced exposure to market segments.
- Sectoral/Thematic Funds: These funds concentrate on specific sectors, such as technology, healthcare, or energy. They are suitable for bullish investors in a particular industry but carry higher risks due to their concentrated portfolio.
- ELSS (Equity Linked Savings Scheme): A tax-saving equity fund with a lock-in period of three years, offering tax benefits under Section 80C.
How to Invest in Equity Mutual Funds?
Here’s a step-by-step guide to investing in equity mutual funds:
Step 1: Set Your Financial Goals: Define your goals (e.g., retirement, education, wealth building) to determine the type of fund you need.
Step 2: Assess Risk Tolerance: Decide on the level of risk you're comfortable with (high-risk equity funds, low-risk debt funds, or balanced hybrid funds).
Step 3: Select the Right Mutual Fund: Choose a fund based on your goals and risk tolerance—equity, debt, or hybrid.
Step 4: Complete KYC: KYC is mandatory. Submit your PAN, Aadhaar, and other documents.
Step 5: Choose an Investment Mode: Decide whether to invest in a lump sum or start a Systematic Investment Plan (SIP) for regular contributions.
Step 6: Pick a Platform: Use online platforms such as Stack Wealth or fund houses to invest.
Step 7: Monitor and Diversify: Regularly track your investments and diversify across funds to balance risk and returns.
Step 8: Stay Invested: Long-term investment helps you gain from market growth and reduce risk.
Who Should Invest in Equity Mutual Funds?
- Long-Term Investors: Those with a time horizon of five years or more can benefit from market growth and compound returns.
- Risk-Tolerant Individuals: Equity funds can be a good fit if you can handle market volatility and are prepared for short-term fluctuations.
- Wealth Accumulation Goals: Investors looking to build wealth for goals like retirement, education, or buying a house can consider equity funds.
- Young Investors: Younger investors with time on their side can leverage the higher growth potential of equities.
- Tax-Saving Seekers: If you want to save on taxes, ELSS funds offer tax benefits under Section 80C and equity exposure.
Taxation Rules of Equity Mutual Funds
- Short-Term Capital Gains (STCG): If you sell your equity mutual fund units within the first year of purchase, the gains are considered short-term and taxed at 15%.
- Long-Term Capital Gains (LTCG): For units held for more than one year, the gains are treated as long-term and taxed at 10% if they exceed ₹1 lakh in a financial year. The first ₹1 lakh of long-term capital gains is tax-free.
Dividends: Under current tax laws, dividends from mutual funds are added to investors' income and taxed according to their respective income tax slabs.
