Equity Mutual Funds are a specific kind of mutual fund scheme that mainly deals with equity shares, or to be more precise, these mutual funds primarily invest in the shares of different companies. The categorization of equity mutual funds is based upon multiple factors, including its managing style, portfolio, company size, demography, etc.
This article covers:
- What is an Equity Fund with Example?
- Types of Equity Mutual Fund
- Best Equity Mutual Fund
- Equity vs Mutual fund
- Equity Mutual Funds Taxation
- Equity Mutual Fund Meaning- Quick Summary
- Equity Mutual Fund Meaning- FAQ
What is an Equity Fund with Example?
Equity funds are typical mutual fund schemes that purchase shares of different companies as a part of their assets. According to the rules of SEBI, an equity mutual fund needs to use at least 65% of its funds to invest in equities or equity-related securities and related products as well as at least 10% fund into debt instruments.
These funds offer a great opportunity to build wealth over the long term since they have the potential for capital appreciation. Due to their extreme reliability on the market condition, equity funds are regarded as high-risk, high-return investments. However, investing in these equity funds for long periods can help you generate huge returns from the stock market.
Types of Equity Mutual Fund
Since investors’ investment preferences are evolving, various types of mutual funds cater to the need of different investor types.
Here are the types of equity mutual funds:
- Based on the market capitalization
- Large-cap mutual funds
- Mid-cap mutual funds
- Small-cap funds
- Large-cap and mid-cap mutual funds
- Multi-cap mutual funds
- Based on investment style
- Index mutual funds
- Sectoral funds
- Thematic funds
- Based on tax benefits
- Equity Linked Savings Scheme (ELSS)
Large-Cap Funds
The large-cap funds usually invest in large companies or, more precisely, in the top 100 companies of the stock market. More than 80% of large-cap funds are used in equity shares, providing more stability than any other equity funds available in the market.
Mid Cap Funds
Mid-cap funds use at least 65% of their corpus to purchase equities of different companies. They usually invest in mid-sized companies (or those that rank between 101 and 250 in the stock market as per market capitalization). Although mid-cap funds are more dynamic than large-cap funds, they offer better stock market returns.
Large and Mid Cap Funds
As the name suggests, this kind of equity mutual funds equally split their funds to invest in both large and mid-cap companies. The asset allocation ratio for this type of mutual fund is 35% in both segments, and they tend to offer a mix of both stability and high returns to the investors.
Small Cap Funds
More than 65% fund corpus of small-cap funds is used to invest in the assets of different companies. These companies must be small, meaning any company holding the 251st position (based on market capitalization). You also need to note that over 95% of companies registered in the Indian stock market come under the small-cap category. Small-cap funds are highly volatile compared to large-cap and mid-cap funds, but they also tend to offer better returns on investment.
Multi Cap Funds
Multi-cap funds utilize 65% of their total fund corpus to invest in large-cap, mid-cap, and small-cap companies. However, the investment proportion can differ according to the scheme’s investment objective and current market conditions. Investors who do not want to be restricted by a particular sector can invest in this type of scheme and gain exposure to the overall market.
Best Equity Mutual Fund
Here are some of the top-performing equity mutual fund schemes available in the market:
| Serial No. | Name of the Scheme | Expense ratio (%) | NAV (in Rs.) | 5Y CAGR (%) | AUM (In Cr.) |
| 1. | Quant Small Cap Fund | 0.62 | 146.32 | 23.52 | Rs. 3,134.10 |
| 2. | Quant Tax Plan | 0.57 | 242.61 | 22.47 | Rs. 2,692.01 |
| 3. | Tata Digital India Fund | 0.31 | 34.68 | 22.29 | Rs. 6,765.81 |
| 4. | ICICI Pru Technology Fund | 0.98 | 141.24 | 21.58 | Rs. 9,091.67 |
| 5. | Quant Infrastructure Fund | 0.64 | 23.02 | 21.34 | Rs. 822.24 |
| 6. | Aditya Birla SL Digital India Fund | 0.88 | 126.85 | 21.11 | Rs. 3,338.13 |
| 7. | SBI Technology Opp Fund | 0.87 | 151.75 | 21.04 | Rs. 2,861.77 |
| 8. | Quant Active Fund | 0.58 | 431.76 | 20.11 | Rs. 3,531.89 |
| 9. | Quant Mid Cap Fund | 0.63 | 136.77 | 19.91 | Rs. 1,491.71 |
| 10. | PGIM India Midcap Opp Fund | 0.46 | 46.75 | 19.16 | Rs. 7,616.87 |
(NAV last updated on 24 March 2023)
Equity vs Mutual fund
The main difference between equity and mutual funds is that equity refers to shares of a company that you can buy and own a part of ownership in the company. On the other hand, mutual funds pool money from multiple investors to invest in a diverse portfolio of stocks, bonds, or other securities.
Ownership
When it comes to mutual funds, investors do not have any kind of ownership over this particular financial instrument, whereas if they purchase equities, then they will be the owners of those shares and possess them in their Demat accounts.
Investment Management
Every single investor does not have the skill and time to research and determine the best and most lucrative equities in the stock market, and oftentimes these equities are managed by the stock brokers of the individual investors.
On the other hand, with mutual funds, you will receive the expertise of fund managers who are certified financial advisors and experts. They have the ability to select the assets that can outperform the market or, at the very least, offer you generous returns on investment.
Risk
The risk factor of equities is higher than mutual funds because mutual funds are diversified in nature and are not directly influenced by the stock market’s volatility. Equities can fluctuate rapidly due to the influence of the stock market.
Mutual funds schemes have strict guidelines that the fund managers need to maintain in order to keep the risk factor at a minimum. When a fund manager decides to invest in a particular share, the individual and their team conduct extensive research to support the decision.
Research
When it comes to mutual fund investment, a fund manager and their team is extensively involved in research and the decision-making process before using the fund corpus to purchase any particular asset.
On the other hand, to purchase equities, the investor needs to conduct their own research about the company, its background, market performance, etc., which can be an incredibly time-consuming process or they can also take the assistance of a stockbroker who will ask for payment in order to offer their services.
Investment assets/diversity in investment
In mutual funds, the fund manager utilizes the fund corpus to purchase equities and various other assets such as government bonds, corporate bonds, money market instruments, etc. In equity investments, the entire amount is used to purchase the stocks or shares of any specified company.
Freedom
If you are investing in equities, then you will have the complete freedom to choose the company you want to invest in. Moreover, you will also be responsible for purchasing and selling the shares.
Since mutual funds are managed by the fund houses and fund managers, they are responsible for the purchase and sale of equities and any other assets. As an investor, you won’t have a say in the same.
Mode of payment
Since equities are directly affected by fluctuations in the stock market, the prices of equities also vary from time to time. Hence in order to purchase equities, the investor’s investment amount will vary depending on the market conditions.
Mutual funds offer both lump sum and SIP or systematic investment plans as their investment mode. You can invest a certain amount of money (based on your preferences) in mutual funds, and the fund house will offer you a specific number of units based on the NAV of that particular mutual fund scheme.
Returns
As an investor, you can expect handsome returns from a mutual fund investment, but you need to stay afloat for a significant period, preferably 7 to 10 years. Equities, on the other hand can give good returns on your investment in a short period of time, but you need to be extremely careful and calculative about your investment.
Volatility
The volatility rate of the stock market is extremely high. Since equities are directly related to the stock market, they are easily affected by the same, which means during a short period, the price of the equities can increase or decrease rapidly. Therefore, if you want to invest in equities, you must continuously monitor the market conditions.
In comparison, mutual funds are relatively stable investment tools because their assets are diversified. More importantly, the profits and losses incurred by the mutual fund scheme are spread equally among the investors.
Cost
Investors must bear certain costs while investing in mutual funds and equities. The fund houses of the mutual fund ask for the expense ratio, which has been capped by the SEBI. The expense ratio includes management fees, allocation costs, annual operating expenses, etc. Some mutual funds also have an exit load.
On the other hand, while investing or trading equities, the investors will have to pay Demat account charges as well as trading charges.
Equity Mutual Funds Taxation
To be eligible for long-term capital gain in an equity mutual fund, the mutual fund’s investor needs to remain invested for at least one year. If the return on investment on long-term capital gain is more than Rs. 1 lakh, then the investor will have to pay a long-term capital gain tax of 10% plus a 4% cess.
For short-term capital gain, the tax rates for equity mutual funds are 15% plus a 4% cess. You also need to note that if an investor earns up to Rs. 1 lakh in the form of long-term capital gain, they don’t need to pay any kind of taxes.
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Equity Mutual Fund Meaning- Quick Summary
- Equity mutual funds are investment tools that principally focus on investing in equities or shares of different companies. As per SEBI, the equity mutual funds in India need to spend at least 65% of their funds on equities.
- Equity mutual funds are high-risk investments that simultaneously offer incredible returns on investment if invested for a long period of time.
- There are multiple kinds of equity mutual funds and among them, large-cap funds are the most stable ones, whereas small-cap funds provide the highest returns.
- Top-performing equity mutual fund schemes available in the market include Quant Small Cap Fund, Tata Digital India Fund, ICICI Pru Technology Fund, etc.
- Investing in equity is suitable for those with good knowledge of researching a company’s fundamentals, whereas investing in mutual funds is suitable for those who do not have time to research and track the market.
- If your long-term capital gain from an equity mutual fund is less than Rs. 1 lakh, then you won’t have to pay any taxes on the same.
- For short-term capital gains earned from an equity mutual fund, you must pay 15% plus a 4% tax cess.
- Long-term capital gains greater than Rs. 1 lakh will be subject to a 10% plus 4% tax on the investor.
Equity Mutual Fund Meaning- Frequently Asked Questions
Equity funds are mutual fund schemes that utilize their maximum investment funds to invest in equities. At least 65% of funds from the equity fund corpus is used to purchase equities of different companies.
Equity funds invest their money to purchase the shares of different companies and when the prices of those shares go up, the fund manager sells those shares to gain profits from their investments.
Yes, equity funds can be a good investment for investors who have the ability to take risks. Usually, it generates maximum returns among all other kinds of investment schemes.
Large-cap equity funds are generally considered the best because they provide stability to the investors, accompanied by handsome returns on investment.
Due to the high volatility rate, equity funds are generally considered risky investments. However, if you take the right approach and stay invested for long periods of time, you can reap huge returns from the same.
The main disadvantage of equity funds includes high volatility rates and increased risk. Apart from that, the fund investors won’t receive any dividends if the company is not performing well in the market.
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