Are you new to investing and curious about Equity Mutual Funds? Don’t worry; we’ve got you covered. This beginner’s guide briefly summarises everything you need about Equity Mutual Funds.
📌 What are Equity Mutual Funds?
Equity Mutual Funds are popular schemes that invest primarily in company shares or stocks. They seek long-term capital appreciation by investing in businesses with strong growth potential.
Equity fund investments carry inherent market volatility, but their capacity for substantial profits attracts investors willing to accept increased risk for the prospect of significant long-term growth.
📌 Features of an Equity Mutual Fund
The objective of equity mutual funds is to increase capital value over time, and they achieve this mainly through investments in stocks. Here are the key features of an Equity Mutual Fund:
1️⃣ Stock-Based Investments – Equity mutual funds invest predominantly in company stocks across different sectors and market capitalisations.
2️⃣ Growth-Oriented – These funds focus on long-term wealth creation rather than immediate returns.
3️⃣ Higher Returns Potential – Compared to other asset classes like debt or fixed deposits, equity funds have the potential to generate higher returns.
4️⃣ Market-Linked Risk – Returns fluctuate based on market performance, making them riskier than debt funds.
5️⃣ Variety of Categories – Equity funds can be classified into large-cap, mid-cap, small-cap, multi-cap, sectoral/thematic, ELSS, etc.
6️⃣ Diversification – They provide exposure to multiple stocks, reducing the risk associated with individual investments.
7️⃣ Tax Efficiency – Equity-linked savings schemes (ELSS) offer tax advantages under Section 80C of the Income Tax Act.
8️⃣ Professional Management – Fund managers actively manage portfolios to optimise returns based on market conditions.
9️⃣ Liquidity – Open-ended equity funds allow investors to redeem units anytime, ensuring liquidity.
🔟 SIP & Lump Sum Investment Options – Investors can invest systematically through SIPs or in a lump sum, depending on their financial goals.
📌 Types of Equity Mutual Funds
1️⃣ ELSS Fund: Tax Saving Mutual Funds: ELSS fund investments provide opportunities for tax deductions as specified by Section 80C of the Income Tax Act. They invest mainly in equity-related instruments.
2️⃣ Large-Cap Funds: These funds focus on large-cap stocks known for their stability and consistent returns.
3️⃣ Large & Mid Cap Fund: These funds aim to balance stability and growth opportunities by strategically blending large-cap and mid-cap stocks.
4️⃣ Mid-Cap Fund: While mid-cap funds target mid-sized companies for their higher growth potential, investors should be aware of the elevated risk involved.
5️⃣ Small-Cap Mutual Funds: These funds invest in small-cap stocks offering high growth potential and higher volatility.
6️⃣ Multi-Cap Fund: These funds offer investors diversification across the entire spectrum of market capitalisations by investing in a mix of large, mid, and small-cap companies.
7️⃣ Flexi-Cap Mutual Funds: Flexi-cap funds adapt to prevailing market conditions by investing in companies of varying market capitalisations.
8️⃣ Focused Fund: These funds invest in a small portfolio of stocks to achieve superior returns.
9️⃣ Contra Fund: Contra funds invest in unpopular stocks, betting on their eventual resurgence.
🔟 Dividend Yield Fund: The main objective of these funds is to generate a consistent income stream by investing predominantly in stocks that distribute dividends.
1️⃣1️⃣ Value Fund: Value funds specialise in identifying and investing in undervalued stocks that they believe will experience future growth.
1️⃣2️⃣ Sectoral Mutual Funds: Sectoral funds offer investors sector-specific market participation by concentrating investments in particular sectors, such as banking, information technology, or pharmaceuticals.
1️⃣3️⃣ Thematic Funds allocate their investments based on particular themes, such as consumption, infrastructure, or sustainability, rather than traditional sectors.
1️⃣4️⃣ Index Funds: Index funds target replicating a particular market index performance, such as Nifty or Sensex.
1️⃣5️⃣ ETFs (Exchange-Traded Funds): While index funds and ETFs share similarities, ETFs offer the added flexibility of being traded on stock exchanges, much like individual stocks.
📌 Types of Equity Funds: Active vs. Passive Management
The management approach of equity funds determines their classification into two primary categories: Active and Passive.
1️⃣ Active Funds: A dedicated fund manager carefully selects and oversees the stock portfolio in actively managed funds. They engage in thorough market analysis, evaluate company performance, and strategically make investment choices to achieve optimal returns.
2️⃣ Passive Funds: Passive funds adopt a strategy of replicating market performance. Instead of trying to beat the market, these funds seek to mirror the performance of a specific market index, like the Sensex or Nifty 50, by holding a portfolio that mirrors the index’s components.
📌 Types of Equity Funds: Based on Market Capitalisation
Equity funds can be classified based on the size of the companies they invest in, which is determined by their market capitalisation. Market capitalisation is calculated by multiplying the company’s total outstanding shares by its market price per share. This categorisation helps investors to distinguish between companies of different sizes and invest accordingly.
1️⃣ Large-Cap Funds: These funds concentrate on investments in established, large-market-capitalisation companies. They are generally perceived as offering a lower risk profile than funds focused on mid-sized or smaller companies.
2️⃣ Mid-Cap Funds: Mid-cap funds invest in companies with medium-sized market valuations. These companies are typically in a growth phase and possess the potential for significant earnings.
3️⃣ Small or Micro Cap Funds: Small or micro-cap funds allocate their investments to companies with smaller market capitalisations. While these investments carry higher risks, they also present the potential for considerable growth.
📌 Types of Equity Funds: Diversified vs. Sectoral/Thematic Funds
Equity Funds are subject to further categorisation according to their respective investment strategies.
1️⃣ Diversified Funds: Equity funds that distribute their investments across various stocks from various sectors and industries are known as diversified funds. These funds provide the advantage of diversification and are suitable for investors seeking a well-balanced portfolio.
2️⃣ Sectoral/Thematic Funds: Sectoral or thematic funds specialise in investments within particular industries or around specific themes, such as information technology, pharmaceuticals, or infrastructure. While these funds may generate higher returns if the chosen sector or theme performs strongly, they also involve greater risk due to their concentrated investment approach.
📌 Pros of Equity Mutual Funds
Here are the key pros of Equity Mutual Funds:
1️⃣ High Return Potential – Equity funds have historically outperformed other asset classes when considering long-term investment horizons.
2️⃣ Diversification – Spreads investment across multiple stocks, reducing the risk associated with individual securities.
3️⃣ Professional Management – Experienced fund managers handle stock selection and portfolio rebalancing.
4️⃣ Liquidity – Open-ended equity funds allow easy redemption, ensuring access to funds when needed.
5️⃣ Systematic Investment Plan (SIP) Option – Enables disciplined investing and benefits from rupee cost averaging.
6️⃣ Wealth Creation – Ideal for long-term investors aiming for capital appreciation and financial growth.
7️⃣ Inflation Beating Returns – Equity funds have the potential to outpace inflation over time.
8️⃣ Tax Benefits (ELSS Funds) – Equity-Linked Savings Schemes (ELSS) offer tax deductions under Section 80C.
9️⃣ Flexibility – Investors can choose from various categories, such as large-cap, mid-cap, small-cap, multi-cap, or thematic funds.
🔟 Regulated Investment – Governed by SEBI, ensuring transparency and investor protection.
📌 Cons of Equity Mutual Funds
Here are the key cons of Equity Mutual Funds:
1️⃣ Market Volatility – Returns fluctuate based on stock market performance, making them unpredictable.
2️⃣ Higher Risk – Equity funds are riskier than debt and fixed-income investments.
3️⃣ No Guaranteed Returns – Unlike fixed deposits or bonds, equity funds do not offer assured returns.
4️⃣ Expense Ratio – Fund management fees and other charges can reduce overall returns.
5️⃣ Tax on Capital Gains – Gains are subject to short-term and long-term capital gains tax.
6️⃣ Emotional Investing Risk – Investors may panic during market downturns and redeem at a loss.
7️⃣ Longer Investment Horizon Required – Equity funds require a long-term investment perspective to mitigate risks.
8️⃣ Fund Manager Dependency – Performance depends on the fund manager’s expertise and decision-making.
9️⃣ Sectoral and Thematic Risks – Some equity funds focus on specific sectors, increasing risk if the sector underperforms.
🔟 Frequent Portfolio Rebalancing – Changes in portfolio holdings can impact returns and investor expectations.
📌 How Does an Equity Mutual Fund Work
An Equity Mutual Fund pools money from multiple investors and invests primarily in stocks to generate long-term capital appreciation. Here’s how it works:
1️⃣ Investor Contribution – Investors buy units of an equity mutual fund by investing a lump sum or through a Systematic Investment Plan (SIP).
2️⃣ Fund Pooling & Stock Investments – The fund manager pools money from all investors and strategically invests in a diversified portfolio of stocks.
3️⃣ Portfolio Management – The fund manager actively monitors and rebalances the portfolio to optimise returns based on market conditions.
4️⃣ Net Asset Value (NAV) Calculation – The NAV, or per-unit value of the fund, fluctuates daily based on the market value of the stocks in the portfolio.
5️⃣ Returns & Capital Appreciation – Investors earn returns through capital appreciation (an increase in stock prices) and dividends paid by the companies in the portfolio.
6️⃣ Expense Deduction – The fund charges an expense ratio, which includes management fees and operational costs, which are deducted from the returns.
7️⃣ Redemption & Liquidity – Investors can redeem their units anytime (for open-ended funds), and the redemption amount is based on the latest NAV.
8️⃣ Taxation on Gains – Short-term (STCG) and long-term (LTCG) capital gains tax apply based on the investment’s holding duration.
📌 How Should You Invest in an Equity Mutual Fund
Investing in an equity mutual fund requires careful planning and strategy. Here’s a step-by-step guide to investing wisely:
1️⃣ Define Your Financial Goals
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- Identify your investment purpose – wealth creation, retirement, child’s education, etc.
- Determine your investment horizon – short-term (3-5 years) or long-term (10+ years).
2️⃣ Assess Your Risk Appetite
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- Equity funds carry market risks; choose funds based on your risk tolerance (low, moderate, or high).
- Large-cap funds are relatively stable, while mid-cap and small-cap funds are riskier but offer higher growth potential.
3️⃣ Choose the Right Type of Equity Fund
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- Large-Cap Funds – Suitable for conservative investors seeking stable returns.
- Mid & Small-Cap Funds – Ideal for aggressive investors willing to take higher risks.
- Multi-Cap & Flexi-Cap Funds – Provide diversification across market capitalisations.
- Sectoral/Thematic Funds – Focus on specific industries; best for experienced investors.
- ELSS (Tax-Saving Funds) – Offer tax benefits under Section 80C with a 3-year lock-in period.
4️⃣ Select a Fund with a Strong Track Record
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- Compare historical returns, fund manager expertise, and performance consistency.
- Check the fund’s Expense Ratio, Assets Under Management (AUM), and Sharpe Ratio for risk-adjusted returns.
5️⃣ Invest via SIP or Lump Sum
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- SIP (Systematic Investment Plan) – Invest regularly with a fixed amount; reduce market timing risk.
- Lump Sum Investment – Suitable when the market is undervalued or for long-term investors.
6️⃣ Choose a Reliable Investment Platform
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- Invest through AMCs, banks, financial advisors, or AMFI-registered MFDs.
7️⃣ Monitor and Rebalance Periodically
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- Assess your portfolio regularly, ideally every six to twelve months, to confirm that it remains consistent with your financial objectives.
- Switch funds if performance deteriorates or your risk appetite changes.
📌 Taxation Rules of Equity Mutual Funds
Equity Mutual Funds are subject to capital gains tax based on the holding period of the investment. Here’s a breakdown of the tax rules:
| Fund Category | STCG (Pre-Budget 2024) | STCG (Post-Budget 2024) | LTCG (Pre-Budget 2024) | LTCG (Post-Budget 2024) |
|---|---|---|---|---|
| Indian Equity Funds/ETFs & Equity-Oriented Hybrids | 15% (if held <1 year) | 20% (if held <1 year) | 10% (on gains above ₹1 lakh, if held >1 year) | 12.5% (on gains above ₹1.25 lakh, if held >1 year) |
| Debt Funds/ETFs & Debt-Oriented Hybrids | Slab rate | Slab rate | Slab rate | Slab rate |
| FOFs (holding <65% in debt) / International / Gold Funds / ETFs | Slab rate | Slab rate (if held <2 years) | Slab rate | 12.5% (if held >2 years) |
📌 Invest in Equity Mutual Funds Through VSJ FinMart
Looking to grow your wealth with Equity Mutual Funds? VSJ FinMart, an AMFI-registered Mutual Fund Distributor, makes investing simple and hassle-free.
Why Invest Through VSJ FinMart?
✅ Expert Guidance – Get personalised fund recommendations based on your goals and risk profile.
✅ Diversified Options – Choose from Large-Cap, Mid-Cap, Small-Cap, Multi-Cap, and Thematic funds.
✅ SIP & Lump Sum Investment – Start with as little as ₹500 per month through SIP or invest in a lump sum.
✅ Paperless & Easy Process – Invest online with seamless KYC and transaction support.
✅ Portfolio Tracking & Support – Regular updates and guidance to optimise your investments.
How to Get Started?
1️⃣ Consult Our Experts – We help you choose the right fund based on your needs.
2️⃣ Complete KYC – Hassle-free online verification.
3️⃣ Start Investing – Begin your journey via SIP or lump sum.
4️⃣ Track & Grow – Track your portfolio and remain on top of market trends.
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📌 Why Should You Invest in Equity Mutual Funds?
Investing in Equity Mutual Funds is one of the best ways to grow wealth over the long term. Here’s why:
1️⃣ High Return Potential
Equity mutual funds have historically given higher returns than fixed deposits, debt funds, or traditional savings options, making them ideal for creating long-term wealth.
2️⃣ Power of Compounding
Investing regularly through SIP (Systematic Investment Plan) helps your money grow exponentially over time due to compounding.
3️⃣ Diversification Benefits
Equity mutual funds invest in multiple stocks across sectors, reducing the risk associated with individual stocks.
4️⃣ Professional Fund Management
Expert fund managers manage your money, analyse market trends and adjust the portfolio to maximise returns.
5️⃣ Flexibility in Investment
You can invest through:
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- SIP (Systematic Investment Plan) – Start with as little as ₹500 per month.
- Lump Sum Investment – Invest a bulk amount when markets are favourable.
6️⃣ Beating Inflation
Equity investments have the potential to outpace inflation, ensuring your purchasing power remains strong in the future.
7️⃣ Tax Benefits (ELSS Funds)
Equity-Linked Savings Scheme (ELSS) funds offer tax deductions under Section 80C of the Income Tax Act, with a 3-year lock-in period.
8️⃣ Liquidity & Easy Access
Unlike fixed deposits, open-ended equity funds offer easy redemption, giving you access to funds when needed.
9️⃣ Regulated & Transparent
Mutual funds are regulated by SEBI, providing transparency and investor protection.
🔟 Goal-Based Investing
Equity funds help achieve financial goals such as buying a house, paying for a child’s education, planning for retirement, and accumulating wealth.
Ready to Invest?
Start your equity mutual fund investment today with VSJ FinMart for expert guidance and seamless investing!
📌 Final Words
Equity funds are popular among investors seeking to capitalise on the stock market’s growth potential while mitigating risk. By primarily investing in publicly traded companies, these funds offer diversification, which spreads risk across numerous stocks, lessening the impact of any single stock’s decline on the overall portfolio.
Explore financial tools: Check out our investment calculators!
📢 Disclaimer
Mutual fund investments are subject to market risks, so read all scheme-related documents carefully before investing. Past performance is not indicative of future results. The information provided in this blog is for educational and informational purposes only and should not be considered investment advice. Investors should consult their financial advisors before making any investment decisions. VSJ FinMart is an AMFI-registered mutual fund distributor (MFD) that does not provide portfolio management or stock advisory services.