Table of Contents
An equity fund is a type of mutual fund that invests mainly in stocks or equities. In other words, it is also known as a stock fund (another common name for equity). Equity represents ownership in firms (publicly or privately traded) and the aim of the stock ownership is to participate in the growth of the business over a period of time. Moreover, buying an Equity Fund is one of the best ways to own a business (in a small proportion) without starting or Investing in a company directly.
These funds can be actively or passively managed, depending on their objective. There are various types of equity funds such as Large cap funds, mid-cap funds, diversified equity funds, focused funds, etc to name a few.
Indian Equity Funds are regulated by Securities of Exchange Board of India (SEBI). The wealth you invest in Equity Funds is regulated by them and they frame policies & norms to ensure that the investor’s money is safe.
To get a thorough understanding about equity one needs to understand each type of the equity mutual fund that is available along with their focused area of investment. On 6th October 2017, SEBI has circulated new Equity Mutual Fund categorisation. This is to bring uniformity in similar schemes launched by the different Mutual Funds.
The aim is to ensure that investors can find it easier to compare the products and evaluate the different options available before investing in a scheme.
SEBI has set a clear classification as to what is a large cap, mid cap and small cap:
|Large cap company||1st to 100th company in terms of full market capitalization|
|Mid cap company||101st to 250th company in terms of full market capitalization|
|Small cap company||251st company onwards in terms of full market capitalization|
Large cap Mutual Funds or large cap equity funds are where funds are invested in a large portion with companies of large market capitalization. The companies invested into are essentially large companies with large businesses and a large workforce. For e.g., Unilever, ITC, SBI, ICICI Bank etc., are large-cap companies. Large-cap funds invest in those firms (or companies) that have the possibility of showing year on year steady growth and profits, which in turn offers stability over a period of time to investors. These stocks give steady returns over long periods of time. As per SEBI, the exposure in large-cap stocks has to be a minimum 80 percent of the scheme’s total assets.
Mid-cap funds or mid cap mutual funds invest in mid-sized companies.These are mid-size corporates that lie between large and small cap stocks. There are various definitions of mid-caps in the market, one could be companies with a market capitalization of
INR 50 bn to INR 200 bn, others could define it differently. As per SEBI, the 101st to 250th company in terms of full market capitalization are the mid cap companies. From a standpoint of the investor, the investing period of mid-caps should be much higher than large-caps due to the higher fluctuations (or volatility) in the prices of the stocks. The scheme will invest 65 percent of its total assets in mid-cap stocks.
SEBI has introduced a combo of large and mid cap funds, which means that these are the schemes that invest in both large & mid cap stocks. Here, the fund will invest a minimum of 35 percent each in mid and large cap stocks.
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Small cap funds take the exposure at the lowest end of market capitalization. Small-Cap companies include the startups or firms that are in their early stage of development with small revenues. Small-Caps have a great potential to discover the value and can generate good returns. However, given the small size, the risks are very high, hence the investing period of small-caps is expected to be the highest. As per SEBI, the portfolio should have at least 65 percent of its total assets in small-cap stocks.
Diversified Funds invest across market capitalization, i.e., essentially across large-cap, mid-cap, and small-cap. They typically invest anywhere between 40–60% in large cap stocks, 10–40% in mid-cap stocks and about 10% in small-cap stocks. Sometimes, the exposure to small-caps may be very small or none at all. While diversified equity funds or multi-cap funds invest across market capitalizations the risks of equity still remain in the investment. As per SEBI norms, a minimum of 65 percent of its total assets should be allocated to equities.
A sector fund is an equity scheme that invests in shares of companies that trade in a particular sector or industry like, for instance, a pharma fund would invest only in pharmaceutical companies. thematic funds can be across a wider sector than just keep a very narrow focus, for example, media and entertainment. In this theme, the Fund can invest in various companies across publishing, online, media or broadcasting. The risks with thematic funds are the highest since there is virtually very little diversification. At least 80 percent of the total assets of these schemes will be invested in a particular sector or theme.
These are equity mutual funds that save your tax as a qualified tax exemption under Section 80C of the income tax Act. They offer the twin advantage of Capital gains and tax benefits. ELSS schemes come with a lock-in period of three years. A minimum of 80 percent of its total assets has to be invested in equities.
dividend yield funds are those where a fund manager deigns the fund portfolios as per dividend yield strategy. This scheme is preferred by investors who like the idea of regular income as well as capital appreciation. This fund invests in companies that provide high dividend yield strategy. This fund aims at buying good underlying businesses that pay regular dividends at attractive valuations. This scheme will invest a minimum 65 percent of its total assets in equities, but in dividend yielding stocks.
value funds invest in those companies that have fallen out of favour but have good principles. The idea behind this is to select a stock that appears to be underpriced by the market. A value investor looks out for bargains and chooses investments that have a low price on factors such as earnings, net current assets, and sales.
contra funds take a contrarian view on equities. It is against the wind kind of investment style. The fund manager picks underperforming stocks at that point in time, which are likely to perform well in the long run, at cheap valuations. The idea here is to buy assets at a lower cost than its fundamental value in the long term. It is done with a belief that the assets will stabilize and come to its real value in the long term.
Value/Contra will invest at least 65 percent of its total assets in equities, but a Mutual Fund house can either offer a value fund or a contra fund, but not both.
Focused funds hold a mix of equity funds, i.e., large, mid, small or multi-cap stocks, but has a limited number of stocks. As per SEBI, a focused fund can have a maximum of 30 stocks. These funds are allocated their holdings between a limited number of carefully researched securities. Focused funds can invest at least 65 percent of its total assets in equities.
Fund NAV Net Assets (Cr) 3 MO (%) 6 MO (%) 1 YR (%) 3 YR (%) 5 YR (%) 2022 (%) Sub Cat. Nippon India Small Cap Fund Growth ₹105.737
₹26,294 13.7 10.8 32.5 47.4 19.7 6.5 Small Cap L&T Emerging Businesses Fund Growth ₹53.0337
₹8,672 10.5 9.2 25 43.8 14.7 1 Small Cap ICICI Prudential Smallcap Fund Growth ₹59.62
₹5,036 11.6 8.1 21.6 43.5 17.7 5.7 Small Cap HDFC Small Cap Fund Growth ₹91.351
₹15,857 11.9 12.8 36.7 43.3 15.1 4.6 Small Cap Kotak Small Cap Fund Growth ₹176.493
₹9,230 8.9 6.2 16.2 42 18 -3.1 Small Cap ICICI Prudential Infrastructure Fund Growth ₹110.51
₹2,373 8.6 9.2 31.8 41.5 16.8 28.8 Sectoral Franklin India Smaller Companies Fund Growth ₹108.672
₹7,593 10.7 11 32.5 41.2 13.1 3.6 Small Cap SBI Contra Fund Growth ₹248.532
₹9,720 8 6.3 26.1 41 17.3 12.8 Contra IDFC Sterling Value Fund Growth ₹101.258
₹5,430 9.3 7.1 22.4 41 13.2 3.2 Value Motilal Oswal Midcap 30 Fund Growth ₹56.9977
₹4,033 12.1 7.8 33.9 39.4 17.6 10.7 Mid Cap Note: Returns up to 1 year are on absolute basis & more than 1 year are on CAGR basis. as on 7 Jun 23
The most fundamental style of investing in equity funds is Growth and Value investing. A fund manager managing a fund may follow either or a mix of these styles (also called a blended investment approach), a brief description is given below:
Value investing is investing in those companies that have fallen out of favour but have good principles. The idea behind this is to select a stock that appears to be underpriced by the market. A value investor looks out for bargains and chooses investments that have a low price on factors such as earnings, net current assets, and sales.
Growth stocks are the companies that are established with better than average earnings, deliver a high level of performance and give growth in profits. Growth stocks have the potential to overtake investments that are slower in growth such as income stocks because profits are generally invested in the company to achieve further growth.
Investing in equity mutual funds can be done through various means. A person wanting to invest in equity funds can invest via mutual fund companies, through distributor services, Independent financial advisers (IFAs), Brokers (regulated by SEBI) or through various online portals.
Many times the investor doesn't pay much attention to the risks as compared to the returns. While choosing a fund to invest, it is very important to know the risks of any investing product, an investor needs to match their risk profile to ensure that the investment is in-line with the set objectives. There are certain risks associated with equity funds, these are mentioned below:
Equity markets are sensitive to macroeconomic indicators and other factors such as Inflation, interest rates, currency exchange rates, tax rates, bank policies to name a few. Any change or imbalance in these affect the performance of the companies and hence stock prices.
The rules and regulations of governing bodies are called regulatory risks. If there is any sudden or unexpected regulatory change, this could create major pressure to company’s costs and earnings impacting stock prices.
If the company becomes highly leveraged ( high on debt) then it faces high-interest payments. Dependencies on receivables would be high and any default on the same could lead to bankruptcy or inability to meet liabilities impacting the stock very negatively.
LTCGs exceeding INR 1 lakh arising from redemption of Mutual Fund units or equities will be taxed at 10 percent (plus cess) or at 10.4 percent. Long-term Capital Gains till INR 1 lakh will be exempt. For example, if you earn INR 3 lakhs in combined long-term capital gains from stocks or Mutual Fund investments in a financial year. The taxable LTCGs will be INR 2 lakh (INR 3 lakh - 1 lakh) and tax liability will be INR 20,000 (10 per cent of INR 2 lakh).
Long-term capital gains are the profit arising from selling or redemption of equity funds held more than a year.
If Mutual Fund units are sold before one year of holding, Short Term Capital Gains (STCGs) tax will apply. The STCGs tax has been kept unchanged at 15 percent.
|Equity Schemes||Holding Period||Tax Rate|
|Long Term Capital Gains (LTCG)||More than 1 Year||10% (with no indexation)*****|
|Short Term Capital Gains (STCG)||Less than or equal to a year||15%|
|Tax on Distributed Dividend||-||10%#|
*Gains up to INR 1 lakh are free of tax. Tax at 10% applies to gains above INR 1 lakh. #Dividend tax of 10% + Surcharge 12% + Cess 4% =11.648% Health & Education Cess of 4% introduced. Earlier, education Cess was 3%.
A 10 percent tax is levied on the income arising out of the dividend distributed by equity-oriented mutual funds.
|Purchase of shares on 1st January, 2017||1,000,000|
|Sale of shares on 1st April, 2018||2,000,000|
|Fair market value of shares on 31st January, 2018||1,500,000|
Fair market value of the shares as on January 31, 2018 to be the cost of acquisition as per the grandfathering provision.
LTCG = Sale Price / Redemption Value - Actual Cost of Acquisition
LTCG= Sale price /Redemption Value - Cost of acquisition
Since there is a lot of confusion over equity vs Debt fund, let's quickly understand the basic difference between them.
As said above, equity funds invest primarily in shares of companies. The main objective is capital appreciation and long-term gains. An investor who wish to invest in this fund should have moderate to high risk appetite.
On the other hand, debt funds are lesser risky than equity funds. As they invest in debt and money market instruments, the risk exposure is not that high. However, there are many types of funds under debt that may require a fair amount of investment tenure. For instance, Gilt fund comes with duration ranging 4 to 7 years and sensitive to high interest rates, whereas Ultra short funds has a duration of 2 to 12 months with moderately low interest risk.
In a nutshell, take a look at the table below -
|Debt Funds||Equity Funds|
|Invests in debt instruments like government Bonds, corporate bonds, etc.||Invests in shares of companies|
|Ideal option for investor who don't want high risk exposure||Ideal for long-term risk takers|
|Expense ratio can be lower||Expense ratio is higher than debt funds|
|There is no option to save tax||You can save tax up to Rs. 1.5 lakh by investing in ELSS|
|Funds held for less than 36 months are taxed as per the income tax rate of the investor. If you hold the fund more than 36 months, then it falls under long term capital gains, which are taxed at 20% after allowing for indexation benefits.||Funds held for less than 12 months are taxed at 15%. Long term capital gains (more than 12 months) of up to Rs 1 lakh is tax exempt and taxed at 10% thereafter.|
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Many people consider equity as a very risky investment, but it’s important to understand the risk & reward and ensure it matches your set objectives. Investing in equity should always be considered as a long term investment!
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