Equity Mutual Funds

This type of fund invests in shares of companies listed on the stock exchange. It seeks capital appreciation by participating in the growth of companies. This is the equity meaning in mutual fund.

Depending on the fund requirement, the portfolio may consist of companies operating in various sectors, industries or market capitalisation. Equity mutual funds are market linked instruments, so their NAV varies with the stock market movement.

These funds are generally suitable for long term investors who are willing to tolerate short term volatility in pursuit of long-term growth potential.

How do Equity Funds Work

Now that you know what is equity mutual fund, let’s see how it works. Such funds pool money collected from various investors and invest a minimum of 65% of the assets in equity and equity-linked securities. This is the equity meaning in mutual fund. A professional fund manager builds and operates the portfolio according to the scheme’s investment objective.

The fund’s Net Asset Value or NAV is calculated daily based on the market value of the underlying securities in the portfolio. The returns are based on the market performance, stock selection and the general economic conditions. Gains or losses are distributed among investors in proportion to the number of units held.

What are the Different Types of Equity Funds

1. By Market Capitalisation

a. Large-Cap Funds
These funds invest in well established businesses whose operations are fairly stable. Such companies are defined as large cap by market regulators. These funds typically offer relatively lower volatility over the equity category while participating in long term growth. The returns are driven by wider market trends and company fundamentals.
b. Mid-Cap Equity Mutual Funds
Mid-cap funds invest in mid-sized companies that have the potential to grow into large caps but may carry higher business and market risk. The NAV of these funds can be more volatile than that of large-cap funds.
c. Small-Cap Equity Mutual Funds
These funds invest in smaller companies that have a lower market capitalisation. Such companies can have greater growth opportunities, but also may tend to be more volatile and risky. The fund performance may fluctuate considerably across market cycles. Also, they can be susceptible to the fluctuations in liquidity and the economy.
d. Large-and Mid-Cap Equity Mutual Funds
The fund manager will invest in a combination of large-cap and mid-cap companies according to the regulatory guidelines. This fund combines the stability of large cap stocks with the growth potential of mid cap company shares.
e. Multi-Cap Equity Mutual Funds
These invest in large-cap, mid-cap and small-cap stocks. Here, fund managers get the flexibility to allocate investments across market capitalisations based on their evaluation of the market opportunities. Portfolio structure can vary with time in response to market movements and valuations.
f. Tax Saving Mutual Funds
Also referred to as ELSS, these funds invest primarily in equities. Investors get tax incentives under Section 80C of the I-T Act. The returns depend on how equity market fares and investment strategy.

2. By Type of Investment

a. Diversified Equity Funds
They invest in various sectors and industries to decrease concentration risk. The investment strategy helps diversify the exposure to various companies and take part in the general growth of the equity market. The performance is contingent on the selection of stocks and the market.
b. Dividend Yield Equity Funds
This type of funds invests in companies with a history of paying relatively higher dividends. This equity participation strategy focuses on generating income through dividend. Fund performance relies on the dividends and share prices trends.
c. Sectoral Equity Funds
They invest in companies within a specific industry like banking, technology or healthcare. The returns are linked to how the sector performs. However, concentration in one industry may result in higher volatility.
d. Contra Equity Funds
Contra equity funds follow a contrarian investment strategy. This type of fund invests in stocks or sectors that are not popular. The strategy aims to capitalise on their potential for value appreciation over time. Returns depend on market sentiment shifts and long term fundamentals.

3. By Fund Management Style

a. Actively Managed Funds
These funds are managed by professional fund managers who choose stocks depending on research, valuation and market prospects. Depending on the investment decisions, portfolio composition can vary with time. The effectiveness of the strategy of the fund manager determines the returns.
b. Passively Managed
These investment options aim to mirror the performance of a given market index. The portfolio is constructed to replicate the index when it is rebalanced.

Benefits and Risks of Investing in Equity Mutual Funds

Equity mutual funds give access to equity markets by providing management of portfolios in a professional manner. Although they have the potential to grow over time in terms of capital, they are also prone to the risks of the markets. An investor needs to evaluate both benefits and risks at before making investment decisions.

Here are the benefits.

1. Long-term capital appreciation potential
   The equities in the portfolio have actually generated wealth in the long term. Equity mutual funds enable investors to participate in market growth without needing to pick stocks. Rather, they rely on professional management and diversification.
2. Diversification
   These funds are invested in various companies, industries or even strategies. It helps diversify risk as opposed to holding a single stock, though it does not eliminate market risk or guarantee positive returns.
3. Liquidity
   Equity mutual funds offer liquidity, allowing investors to purchase or redeem units on a business day at the current NAV. This supports long-term planning. Investors need to look for exit loads applicable on the particular scheme.

Let us now look at some risks.

The key risk is market volatility, because the value of fund varies depending on the movement of the stock market. Also, temporary losses may occur particularly in periods of recession of the market. The performance can vary according to the economic conditions and sector exposure.

How to select the right equity mutual fund scheme?

Here are some factors that investors tend to look at to pick a scheme compatible with their investment expectations, risk tolerance and horizon.

1. Investment objective
   Investors should first ensure that the fund’s stated objective (long-term growth, tax planning, or sector focus) aligns with their financial goals.
2. Risk profile
   This is another point to consider. Different funds come with varying volatility levels, hence it is crucial to know the risk tolerance and the fund’s investment strategy.
3. Historical performance
   Assess the fund’s track record across market cycles. They can indicate its consistency and volatility. However, past results are not an assurance of future results.
4. Costs of the fund
   Investors need to compare the costs like expense ratio and portfolio turnover. Lower cost may improve returns in the long run. But this should not be the sole deciding factor to pick a fund.

Who Should Invest in Equity Mutual Funds?

Equity mutual funds are generally suitable for investors looking for long-term gains in capital value and are not afraid of market fluctuations.

1. Investors with long-term investment horizon
   If an investor is seeking returns over a longer period of time, then these funds would help absorb short term fluctuations. They can align with long term growth prospects of the equity market through full economic cycles.
2. Investors with wealth generation goals
   Equity funds could be considered by investors who want to accumulate wealth in the long term (e.g. retirement, long-term financial planning, etc.), subject to their risk appetite.
3. Investors seeking professional management
   Equity mutual funds may be ideal for investors who prefer to rely on expert fund managers for stock selection, research and ongoing portfolio management.
4. Investors who are comfortable with volatility
   Some investors accept the fact that their investment value may fluctuate with market movement. Equity mutual funds will be ideal for such investors. Investors with low risk appetite would tend to have a lower allocation of equity funds in their portfolio.

How To Invest in Equity Mutual Funds with HDFC SKY?

Investing in HDFC SKY equity mutual funds provides access to a dedicated digital investment platform for Indian investors.

Here are some steps to ensure informed decisions and easy transactions with the platform.

1. Explore and compare various financial products
   Investors can research available equity mutual fund schemes on the platform. They can examine the scheme details, investment objective, risk profile and performance history to make an informed choice.
2. Choose investment mode
   The site gives investors an option of choosing between lump sum investments or systematic investment plans. The decision will depend on their personal financial preference.
3. Execution and tracking
   Investments are made online for convenience. Investors can track their holdings and portfolio performance using the platform.

HDFC SKY provides a streamlined platform to start your equity mutual fund investment journey

What is the Taxation on Equity Mutual Fund?

Equity mutual fund taxation is based on the holding period and type of fund.

Category for equity mutual fund taxation	Holding period	Applicable tax rate
Equity mutual funds (short term)	upto 12 months	20% on gains
Equity mutual funds (long term)	more than 12 months	12.5% on gains above Rs. 1,25,000 in a year
Dividends from Equity mutual funds	NA	Added to income and taxed at applicable tax slab
ELSS (Tax saving Equity mutual funds)	Mandatory lock-in period applies	Same capital gains rules as equity mutual funds

Things to consider when investing in equity funds

Before investing in equity funds, you should carefully evaluate several factors. This will help align the investment with your financial goals and risk tolerance.

1. Investment Horizon
   Equity funds are generally held in the long term (five or more years). This holding period helps ride out short term market volatility and economic cycles.
2. Risk Tolerance
   It is advisable to do a risk assessment before investing. It will help to select the proper fund categories in equity funds.
3. Portfolio Diversification
   Consider how the equity fund fits into overall investment portfolio along with other asset classes (like debt, bond or gold) to manage overall risk exposure.
4. Regular Monitoring
   You should periodically review investments to watch for fund performance, investment strategy changes and market conditions. This helps investors to align portfolio with long term financial objectives.