As the name suggests, equity mutual funds are funds where the majority of the fund's money must be invested in stocks. They are the most popular type of mutual funds among retail investors.
Equity mutual funds are further sub-categorized into many types, but before exploring that, let us try to understand the objective of investing in equity mutual funds.
Equity mutual funds are for investors looking to create wealth. Now you may ask, "Aren’t all the funds for the same purpose?” Yes, they are, but investing in equity involves a higher level of risk, which leads to the expectation of higher returns.
Investing in equity mutual funds is better for the long term. So if you do not stay invested in these funds for the long term, then you may generate subpar short-term returns. For example, in the last 12 months, the stock market in India has not generated any significant positive returns. But in the long run, our benchmark index, Nifty 50, has increased at more than 10-11% CAGR.
So, there is a high chance of the fund not performing well if the investment horizon is short term like 1 year or so. Investing in equity mutual funds must be for the long term (ideally more than 5 years). These mutual funds can be used for long-term goals like retirement planning and child education.
Equity mutual funds invest in stocks which makes them risky.
Retired people who do not have any active source of income and rely on their investments to generate income should ideally stay away from equity mutual funds due to short-term uncertainty.
Individuals with active income looking to build long-term wealth should definitely invest in equity mutual funds because equities are the best asset class for creating long-term wealth.
Based on the market capitalization of the underlying stocks, mutual funds can be divided into the following types:
They can be also divided according to tax saving perspective (ELSS and non-ELSS) and management style (active and passive).
There are other sub-categorizations (like thematic and sectoral) as well. SEBI has provided a detailed categorization framework for equity mutual funds. You can find the complete list here.
At sharpely, we use the categorization provided by Value Research which we believe is more comprehensive than SEBI categorization. You can find the details of our categorization here.
Capital gains are taxed based on the holding period of the mutual fund. If the holding period is less than 12 months, it attracts Short-Term Capital Gains (STCG) tax. STCG for equity funds is taxed at a rate of 15% without any exemption and irrespective of your tax bracket.
In the case of equity funds with a holding period of more than 12 months, it attracts Long Term Capital Gains (LTCG) tax. Long-term holders get an exemption of up to Rs. 1 lakh each year. Over and above Rs. 1 lakh limit, mutual fund gains are taxed at 10%.
Equity mutual funds are the ones that invest the majority of the fund's money in stocks. According to SEBI equity mutual funds must invest at least 65% of the fund's assets in equity and equity-related instruments.
Direct investing in stocks demands a lot of research. You may not have the time and expertise to do it by yourself. This is where you can consider investing in equity mutual funds as they will provide a diversified portfolio managed by expert fund managers.