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  • Writer's pictureTeam ArthaPurna

Equity Mutual Funds

Updated: Oct 27, 2022


The majority of the combined funds are invested via equity mutual funds in equities of various businesses. As a result, equity mutual funds have a larger market risk by nature. Earnings, revenue projections, management changes, and corporate and economic strategy all have an impact on price changes and returns. Equity fund returns are subject to significant swings. Therefore, you should invest if you have a good grasp of the risks related to equities as an asset class.


Category of Equity Mutual Funds: -


1. Large Cap Fund

A large-cap equity fund, as its name suggests, is one that primarily invests in large-cap equities. These are top 100 Indian firms by market capitalization and are anticipated to dominate their respective markets. Additionally, these businesses should be secure and reliable. Companies like TCS, Reliance, Infosys, HDFC Bank, etc. are examples of large-cap stocks. Large-cap equities make up the majority of the portfolio (80%), albeit they are distributed in different percentages. The fund manager has the discretion to decide how much weight to give each stock. The AMC is required to make the portfolio information public once a month.

When investing in a large-cap fund, a potential investor has two goals in mind:

  • market-beating capital growth, and

  • minimal volatility. In this case, when we refer to low volatility, we are referring to small- and mid-cap funds.

2. Mid-cap Funds

These funds invest in 101st to 250th companies in terms of full market capitalization and the mid-cap fund mostly invests in mid-cap stocks. Mid- and small-cap stocks have a lot of volatility. Similar to large-cap equities, these funds should only be invested in over the long term. You shouldn’t make short-term investments in these funds.


3. Small-cap Funds

They feature small-cap companies and invest in 250th company onwards in terms of full market capitalisation. You anticipate a far bigger return than a large-cap fund (against much higher volatility). This is clear given that the fund invests in businesses with significant room for expansion. The returns would increase as the business expanded.


4. Multi-Cap Funds

The market capitalisation of a multi-cap fund is not fixed. The portfolio manager has complete freedom to choose stocks from the market as he sees fit (the diversification is mainly in terms of market capitalization). The fund manager is sort of looking for chances that make sense in his opinion. A multi-cap fund is only required to invest 65% of its assets in equities and associated products.


5. Flexi-Cap Funds

Flexi Cap invests in opportunities throughout the full range of market capitalization. Depending on their appeal, these sorts of funds have the ability to go dynamically overweight or underweight. They stand out among all other types of funds because of this. According to the updated SEBI notification, these funds must invest 65% of their assets in stocks. Open-ended dynamic equity funds, these fund schemes invest in large-cap, mid-cap, and small-cap equities. The fund managers of the Flexi cap category can invest in any company, regardless of size, without restriction. They can profit from tiny, expanding companies with sound balance sheets and stocks with high growth rates


6. Focus Funds

The portfolio of the focus funds only includes up to 30 stocks, resulting in a concentrated portfolio. Each stock is chosen by the fund manager only after thorough research. This is what is referred to as high conviction betting in the investment industry. Focused fund average stock count is around 25.A concentrated fund's risk and return profile differs significantly from other equity mutual funds due to the limited number of stocks it holds.


7. Dividend Yield Funds

As you might expect, the technique entails investing in businesses that consistently pay out big dividends. The fund invests 65% of its corpus in dividend-paying equities; the remaining 35% is available for alternative investments, meaning that it may be used to purchase non-dividend-paying stocks.


8. ELSS Funds

The "Equity-linked Savings Scheme" or "ELSS funds" are a unique class of mutual funds that are exempt from taxes on investments made under section 80C of the Indian Income-tax Act, 1961. ELSS funds are required to have a 3-year lock-in period. ELSS funds are required to invest 80% of their assets in equity and securities linked to equity. The market capitalisation of stocks is unrestricted. In general, ELSS mutual funds can possibly be used as a stand-in for multi-cap funds.


9. Contra Funds

Contra funds are those funds that make investments in stocks that aren't doing well at the moment. To put it another way, investing in these funds is investing in funds that the market is currently ignoring but that have solid fundamentals and asset values. As a result, these funds do have the potential to bounce back and perform better over time.


10. Value-Oriented funds

Value fund managers frequently search for businesses that might be undervalued compared to their inherent worth but that might also have some competitive advantages. The fund management may purchase a company if they think it is worth Rs 100 although it is currently trading at Rs 80. These funds are predicated on the idea that while stocks may currently be discounted as a result of some short-term losses, they will eventually recoup their value.


11. Sectoral Funds

A sectoral fund makes at least 80% of its net investments in equity stocks of businesses engaged in a specific industry. This indicates that the fund's investment portfolio should consist primarily of businesses operating in the same macroeconomic environment. Sectoral funds are therefore sector-specific mutual funds that let investors take advantage of investment opportunities in a certain industry. They enable investors to maintain a focused investing portfolio.



Risk of Mutual Funds

Every investment carries some risk. Investments in mutual funds are riskier than bank deposits but less risky than direct equity investments. Different mutual fund schemes have varying levels of risk. This may be the result of the investment portfolio's management, the underlying investments' exposure to micro- and macroeconomic factors, or all of the above. In India, people don't comprehend (or don't want to understand) the risks associated with mutual funds.


Risks of Equity Mutual Funds

Due to market volatility, equity funds are regarded as high-risk mutual funds in India.

  • Volatility Risk: The majority of an equity mutual fund's investments are made in equities and securities related to equity. The value of the NAV may change if the market is erratic. The NAV will drop if the underlying stocks experience significant value losses.

  • Performance Risk: Unless the fund manager manages the portfolio very effectively, the return on investment in equity funds is low when the market is struggling.

  • Concentration Risk: If a significant amount of the portfolio is invested in a single stock or industry, there is a chance of suffering greater losses if that stock or industry underperforms. These risks may be present for sector/thematic funds.


Taxation on Equity Mutual Funds: -

Mutual funds classified as equity funds have an equity exposure of at least 65%. Regardless of your income tax level, short-term capital gains on redeeming your equity fund units within a holding period of one year are taxed at a flat rate of 15%.


When you sell your stock fund units after holding them for at least a year, you realise long-term capital gains. These capital gains are tax-free up to Rs 1 lakh each year. Any long-term capital gains in excess of this threshold are subject to 10% LTCG tax, with no benefit of indexation.

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