Introduction
Investing using equity funds has been a favorite method of generating wealth over time, with plenty of changes since mutual funds inception in India. Choosing the right equity fund is often a difficult job as there are so many options out there. However, knowing the types of equity funds available together with their unique benefits will enable you make informed decisions.
What Are Equity Mutual Funds?
Equity mutual funds basically invest in equities of various companies. High returns are their aim through diversifying among different sectors as well as companies falling on the different segments of the market capitalization. Contrarily to offer conducted by debt-based fund, these usually are believed to promise higher returns. Nevertheless, these kinds of investments always come with risk since they depend heavily on fluctuations in the stock exchange.
Some Key Aspects of Equity Mutual Funds
Apart from other mutual funds, equity mutual funds have their own unique attributes. These funds keep more than 60% of their assets in shares of companies. Based on the objectives of the scheme, the rest of the investments may be in bonds or money market instruments. The performance of these investments is highly correlated with market trends and the fund manager’s strategic decisions who can opt for either growth or value approach.
Types of Equity Mutual Funds
Different types of equity mutuals can be distinguished on the basis of various factors such as investment style, tax treatment, investing strategy as well as market capitalisation. This knowledge about categories can assist an investor to select a fund that meets their financial requirements without difficulty.
- Investment Strategy-Driven Classification:
· Theme-based or Sectoral Funds: These funds target a particular investment theme such as international stocks or emerging markets. Alternatively, they may specialize in an industry like IT, pharmaceuticals, or BFSI (Banking, Financial Services and Insurance). Although these funds have the potential to generate high returns they also accompany higher risks since they are limited to certain area of investments.
· Focused Equity Funds: These funds put money into a limited number of stocks typically not exceeding 30 from firms of specific market capitalisation. This concentrated strategy is aimed at maximizing gains by placing emphasis on selected stocks that exhibit high levels of prospects
·Contra Equity Funds: By contrast, these funds buy underperforming stocks with the hope that they will bounce back after some time and return substantial amounts eventually. - Classification based on Market Capitalisation:
· Large-cap Funds: Capital released by large enterprises investing in well-established larger-sized capitals. Despite their safety features returns tend to be low.
· Mid-cap Funds: Companies which fall within this band have a medium size and thus provide a risk-return balance with an opportunity for substantial expansion.
· Small-cap Funds: They are however more speculative since their investments are directed towards smaller companies with immense growth potential than those investing during smaller capacity investments.
- Classification based on Tax Treatment:
· Equity Linked Savings Scheme (ELSS): Section 80C of the Income Tax Act provides some tax advantages for this type of mutual fund–the only one with tax benefits–that is available in India today called as ELSS. This category holds at least 80% equity instruments and comes with three-year lock in period.
· Non-Tax Saving Equity Funds: However unlike ELSS, such funds do not allow for any kind of taxation allowance and can be assed gad to capital gains taxes as such.
- Categorisation Based on Investment Style:
· Active Funds: These are funds whose management is done by managers who depend on their know-how in selecting stocks that would perform well.
· Passive Funds: Such funds depend on the market index or segment with little or no active stock selection by the fund manager.
What Is An Equity Mutual Fund?
Several participants’ money is pooled together in mutual funds that invest in different companies’ equities. In this aspect, he has a substantial role to play in determining if it is going to be growth or value oriented investment strategy. It will only be successful if its manager understands how to trade under different circumstances and combines various shares correctly.
Perplexity and Burstiness in Equity Mutual Fund Investments
Before investing in equity mutual funds, one must consider investment horizon, risk tolerance, and financial goals. A new investor may find it easier to enter the stock market through equity funds as they do not require one to have huge amount of money or be experienced. However, it is more prudent to select a fund depending on your risk appetite and long-term objectives.
In case you are an advanced investor, knowledge about various types of equity funds will enable you to make wise investment decisions which yield greater returns. Furthermore, they can use their market expertise to choose funds that synchronize with their monetary plans.
Why You Should Be Investing in Equity Mutual Funds?
Some other low risk investment vehicles cannot give rise better returns than equity funds do over time period of ten years or more. They foster wealth creation while ensuring diversification in portfolios as well. Besides, these investments act as a hedge against inflation and have potential to perform better than fixed income plans over a prolonged duration.
Capital Gains Taxation of Equity Mutual Funds
Capital gain taxes apply on Equity Mutual Funds. For a period not exceeding one-year, short-term capital gains (STCG) on the sale of equity mutual funds are taxed at 15%. Long-term capital gains (LTCG) are taxed at 10% with no indexation benefit and only on gains above Rs. 1 lakh.
Conclusion
Equity mutual funds are an adaptable means to invest that suit various financial ambitions and risk appetites. Therefore, if you understand these different types of equity funds and their advantages, you can make informed choices according to your financial goals.