What are Equity Mutual Funds – Types, Taxation and Risks?

An equity fund is also known as a type of mutual fund scheme that invests in equity stocks and equity derivatives of companies. It is also popularly known as growth or stock funds, either active or passive. In an active fund, the fund manager scans the market, researches companies, examines performance, and looks for high performing stocks.

On the other hand, in a passive fund, the fund manager builds a portfolio that builds a popular market index. Equity funds, also known as equity fund schemes, invest their assets in the stock of different companies; these funds are a great investment option as they have the potential for long-term wealth creation.

Now that you know what is equity funds, let’s move forward to know its types. As per SEBI (the securities and exchange board of India), the regulator of mutual funds in India, equity funds have been further categorized into ten categories. This initiative of SEBI has been made to help investors identify schemes that cater to their investment needs and risk appetite. Take a look at the type of equity funds.

● Large-cap funds: These types of equity funds are an open-ended equity scheme that majorly invests in large-cap stocks, and here, the investor should invest 80% of the total asset in equity.

● Mid-cap funds: The investor should invest 65% of total assets in equity and its related securities of mid-cap firms.

● Small-cap funds: These types of equity funds are an open-ended equity scheme where the investor should invest 65% of the total asset of equity and its related securities of small-cap firms.

● Multi-cap funds: It is an open-ended equity scheme that majorly invests across large-cap, mid-cap, and small-cap stocks.

● Large-cap and small-cap funds: The investor should invest 35% of total assets in the equity of large-cap firms and 35% of total assets in the equity of mid-cap funds.

● A dividend yield fund is also an open-ended equity fund where the investor should majorly invest 65% of total assets in equity.

● Value funds: This mutual fund follows a value investment strategy, where the investor should follow an investment strategy and invest 65% of total assets in equity funds.

● Contra fund: The investor should follow a contrarian investment strategy and invest 65% of total assets in equity.

● Focused fund: The investor should focus on the number of stocks and invest 65% of total assets in equity and related securities.

● ELSS: It is an open-ended equity-linked savings scheme with a statutory lock-in of 3 years and tax benefits.

Every investor thinks of gaining a good return on investment, and equity funds are popular among investors because of their potential of generating high returns. Investors looking to invest for more than five years should consider investing in equity funds. Equity funds are not very suitable for a relatively short-term period. However, if an investor has a long-term goal, investing in equity funds is always desirable.

If you are willing to invest in equity funds, here are some factors to consider that will help you choose suitable funds.

1. Size of the fund- the size of the fund is the total assets under management (AuM). There is no definition regarding the ideal size of funds; if it is too large or too low, the fund's performance can get affected.

2. Expense ratio- as an investor, you will have to bear the fund management costs charged as an expense ratio.

3. Risk reward ratio- This is the potential return investors can earn for every rupee they have risked and invested in the market. It further helps the investors compare the returns of different investments and ensures that the RRR of the fund is in sync with the risk tolerance levels.

4. Tax benefits- ELSS or equity-linked savings schemes are equity funds that offer tax benefits under Section 80C of the Income Tax Act.

5. Types of equity- you can also consider types of equity funds before investing in them. Choose from the following equity funds per your needs; sectoral needs, thematic funds, focused equity funds, etc.

No investment is completely without risk and the same is true for Debt Funds. This is the case even though debt funds are less volatile as compared equity investments, especially in the short term. Below are the key risks you need to consider before making debt fund investments:

Investors generally do not think about tax on mutual funds when making investment decisions. Two types of taxes are levied on equity funds depending on the period.

● Long-term capital gain tax (LTCG)- Equity funds held for more than a year are termed long-term capital gain tax. The current LTCG tax is 10%.

● Short-term capital gain tax(STCG)- Equity funds held for less than a year are termed short-term capital gain tax, and the revised STCG tax is 15%.

Equity funds are, to this day, seen as a risky investment, which is why many people choose not to invest in them throughout their lives. However, every investment involves some risk, and many factors make an investment more or less risky. Look at the common risks involved in equity fund investments.

● Risk of price- Like other markets, equity markets can be very unpredictable and volatile in the short run of things; prices can fluctuate up and down, affecting the mutual fund NAV. So, invest carefully and evaluate the risk.

● Risk of liquidity- This risk comes up when you find it impossible to sell stock at a price you want. Liquidity risk arises when dealing with a certain kind of stock or security.

● Macroeconomic risk- This kind of risk is caused due to a multitude of factors: corporate earnings of the company or stock you have invested in, inflation, interest rates, or growth.