Important Things to Know before Investing in Equity Funds

Mutual Funds have an array of funds that you can invest in. One such fund is Equity Funds. Investing in Equity Funds can be rewarding and on the same hand be a little risky as well.

In this article –

What is a Mutual Fund?

A mutual fund is a professionally managed financial apparatus that is formed by pooling resources from various investors. This pool of investments is further invested in various securities like bonds, shares, stocks and other assets. Professional fund managers distribute and allocate funds to various securities to yield the maximum possible investment posing the minimum possible risk. 

What is Equity Fund?

Equity funds are those mutual funds wherein the fund manager tries to generate a significant amount of profit by investing in various companies stocks from different sectors with varying market capitalization across the market. Investing in Equity funds is the riskiest form of mutual fund investment since it yields the maximum profit. 

What is the working model of Equity Funds?

Fund managers of Equity Mutual Funds invest at least 60% of their assets in numerous companies in suitable proportions. The asset allocation and distribution can be made based on sectors, market capitalization and investment style. The remaining portion of the investment is generally allocated to debt or money market instruments which helps in reducing the risk significantly and takes care of unanticipated redemptions.

What is the ideal category of people who should invest in Equity Funds?

Young Investors: Young investors generally have more risk-taking ability, inquisitiveness to explore the market. Moreover, they have less financial burden, which helps them go all out without worrying much about losing. Young investors generally prefer investing in Large- Cap funds, which allows them to invest only in stocks of top-performing companies with limited risk and more returns.

Seasoned InvestorsInvestors who have been in the market for quite some time and are willing to take calculated risks can opt for investing in equity funds. These investors generally prefer investing in Equity funds and at the same time diversified funds, which helps them get a combination of optimum return with limited risk.

What are the features of Equity Funds?

Investment expense: The cost ratio of equities funds is frequently influenced by frequent buying and selling of stock. For equities funds, the Securities and Exchange Board of India (SEBI) has set a 2.5 per cent cost ratio limit. Investors should expect more significant returns if the expense ratio is lower.

Holding Period: On the redemption of their fund units, investors realize capital gains.

Investing in Equity Funds

What are the Types of Equity Funds?

Theme and sector-based: An Equity Fund may choose to invest in a particular investing subject, such as foreign stocks or developing markets, for example. Some plans may also invest in a specific market sector, such as BFSI, IT, or pharmaceuticals.

 Market Capitalization: Large-cap funds are from well-established companies that provide a stable return throughout the tenure. Mid-cap funds are from medium-sized second tire companies, which are not that stable as significant cap funds. Small-cap funds are volatile and might offer huge profits and a significant amount of loss at the very same time.

Investment styleActive funds are funds that are directly managed by a fund manager. Passive funds are automated wherein a fixed share of certain stocks are purchased and sold regularly, and it is not overseen by a fund manager.

Tax benefitsELSS Funds are the only equity funds that give tax advantages of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. These funds must invest at least 80% of their total assets in equities and equity-related products. Furthermore, these plans have a three-year lock-in term. Except for ELSS, all other funds are taxable.

Do Equity funds perform well in India?

Equity funds, on average, outperform all other types of mutual funds in terms of returns. Equity funds have produced returns ranging from 10% to 12% on average. Returns vary based on market circumstances and the general state of the economy. You must carefully select your equity funds to achieve returns that meet your objectives.

Investing in equity funds

What are the benefits of Equity Funds?

Efficient fund managementFunds are managed by professionals, which reduces the burden on individuals. They can rely on the fund managers to take care of their portfolio in the best possible manner.

Risk: Optimal risk reduction occurs since fund managers are highly skilled in properly allocating funds in the best possible manner.

DiversificationDiversification is the most important aspect of having a varied and successful portfolio. Investing in Equity funds is good but also explore other funds based on your goals.

SafeFunds are regulated by the SEBI, which ensures there is enough transparency in the operations.

What are the factors to be considered before investing in a particular equity fund?

SizeThe fund size shouldn’t be too large or too small since that won’t yield the optimal results.

ExpenseEvery investor of a particular fund has to bear the expenses to a certain proportion. Actively managed funds have a higher expense ratio than passive funds.

Risk/ Reward: Risk-reward ratio is the amount of return generated by taking a certain amount of risk.

Tax benefits: It’s essential to read through the tax benefits offered by the particular mutual fund.

DividendIn April 2020, the Dividend Distribution Tax (DDT) was repealed. However, a new Section 194K was enacted, requiring dividends received more than Rs.5000 will be subject to a 10% TDS. 

Investing in Equity Funds

What is the Taxation of Equity funds?

Short-term capital gains (STCG) are taxable at the rate of 15%. The Union Budget 2018-19 brought back the long-term capital gains (LTCG) tax on equity holdings. It is applicable at the rate of 10% if the gains exceed Rs 1 lakh a year.

Capital gains in the hands of the investor are taxed. The rate of taxes is determined by the length of time one invests, referred to as the holding period. Short-term equity holdings are taxed at 15%, while short-term capital gains are taxed at 15%. Long-term equity holdings are defined as those held for more than a year, and long-term capital gains are taxed at a rate of 10% if the gains reach Rs 1 lakh per year. 

Key Takeaways

Investing in Equity Funds is the riskiest and at the same time the most rewarding form of mutual funds. A particular investor needs to read all the terms and conditions, consult experts, understand the financial condition and risk-taking ability before investing in Equity funds or any other mutual funds.


Source

Leave a Reply

Your email address will not be published. Required fields are marked *

scroll to top