Types of Equity Mutual Funds

Based on Investment Objective:Though the objective of all equity funds is generally capital appreciation, it is the risk taken to achieve this objective that varies. This further depends upon the types of stocks that the fund invests in. Some types of equity mutual funds based on their investment objective are:

1. Small-cap Equity Funds

These equity mutual fund schemes invest in companies that rank above 250 in terms of their full market capitalization (as per SEBI guidelines). These funds are considered to be riskier than mid- or large-cap equity funds but can offer the relatively higher returns. Their minimum exposure to such stocks is 65% of the total assets

2. Mid-cap Equity Funds

These equity mutual fund schemes invest in companies who rank between 101 and 250 by their full market capitalization. These funds are considered to be less risky than small-cap funds, but more than large-cap funds. Their minimum exposure to such stocks is 65% of the total assets.

3. Large-cap Equity Funds

These equity mutual fund schemes invest in companies who rank between 1 and 100 in terms of full market capitalization. These funds are considered to be the least risky as far as equity fund-picking goes. Their minimum exposure to such stocks is 80% of the total assets.

4. Large- & Mid-cap Equity Funds

These equity mutual funds equally divide the allocation between large- and mid-cap equity and related instruments and have the potential to offer high returns. The mandated minimum exposure to both large-cap and mid-cap stocks is 35% each of the total assets.

5. Multi-cap funds

Multi-cap equity funds invest in stocks across large-, mid-, and, small-cap companies. Depending on the market conditions, the fund manager decides the predominant investments. Their minimum exposure to such stocks is 65% of the total assets.

Benefits of investing in Equity Funds

• 1. Professionally managed: Fund managers are market experts who professionally manage equity funds. These experts study the market, analyze the performance of various companies, and invest in the performing stocks that could deliver optimal returns to the investors.
• 2. Easy on pocket: An individual can invest in equity funds through the SIP (Systematic Investment Plan) method, wherein she/he can make weekly, bi-weekly, or monthly or quarterly investments as low as Rs. 500. Investing via SIP is a popular method of investing in equity funds as it helps beat the volatility of the equity markets through rupee-cost averaging.
• 3. Portfolio diversification: Individuals are exposed to various stocks when they invest in an equity mutual fund. Thus, even if some stocks in the portfolio underperform, the individual would be able to achieve capital gains from the performance of the other stocks investments.
• 4. Liquidity: Units of an equity fund can be redeemed anytime on any business day at the applicable NAVs. This offers liquidity to investors. An exception to this is ELSS funds, wherein an investor cannot liquidate unless the lock-in period, i.e. 3 years, is over.
• 5. Capital growth Equity funds have the potential to offer considerable returns to beat inflation. Individuals can accrue a substantial amount of wealth over the long-term by investing in equity funds.
• 6. Tax benefits: Individuals investing in ELSS funds enjoy tax deduction. An individual can invest Rs. 1.5 lakh in ELSS schemes under Section 80C of the Income Tax Act, 1961, and save up to Rs. 46,800 (assuming the highest slab of income tax i.e. @30% plus education cess 4%) each year, effectively reducing their tax liabilities.

Tax Benefits of Equity Funds

LTCG (long-term capital gains) tax is applicable at 10% on capital gains exceeding Rs. 1 lakh (long term capital gains amount from equity oriented mutual funds/ equity shares) in a year without any indexation benefit. STCG (short-term capital gains) tax of 15% applies to investments in equity funds provided that the seller pays STT (securities transaction tax) of 0.001%. Funds qualify for LTCG if they are held for a duration over 12 months and for STCG if they are held for less than 12 months.

However, ELSS funds differ from regular funds as they have a lock-in period of 3 years. This means that ELSS mutual funds can be redeemed only at the end of this lock-in period. ELSS funds is tax saving option under Section 80C.