All about equity mutual funds explained

 

When we speak of mutual funds, it is a common misconception that equity mutual funds form a major chunk of mutual funds in terms of assets under management.


In reality, liquid and debt funds form the major portion of asses under management in mutual funds.


This is because large corporations, FII’s and HNI’s park a substantial sum in liquid and debt funds as compared to equity funds.


Overnight and liquid funds provide necessary security whereas short term funds make more sense with dwindling fixed deposit rates.

 

equity funds



What is an equity mutual fund?

An equity mutual fund is any fund that invests a minimum of 65% of its corpus in equities at all times.


Equity funds are funds that invest in listed shares of companies.


Equity mutual funds carry the most risk among all mutual funds but at the same time they also hold the potential to generate the highest returns.


Only elss funds, also known as tax saving mutual funds need to invest 80% of its corpus in equities at all times as opposed to 65% for other equity mutual funds.


Equity mutual funds should ideally be opted for by investors who:

  1. Have a long-term horizon
  2. Can stay disciplined
  3. Would not need the money within 5 years
  4. Can also invest via SIP

 


Additional reading: Click Here to read about the various Types of Equity Mutual Funds


 

How do equity mutual funds work?       

As previously mentioned, for a fund to qualify as an equity fund it would need a minimum of 65% investment into equities at all times. (except for elss funds)


Besides this general rule, there are certain other restrictions as well.


  1. A small and mid cap fund at all times need a minimum of 65% investment in small and mid cap stocks.
  2. A large cap needs a minimum of 80% investment in large cap stocks at all times.
  3. A large & mid cap fund needs a minimum of 35% investment into each large and mid cap stocks.
  4. A multi cap fund needs a minimum of 25% investment into each large, mid and small cap stocks at all times.


All the above necessary mandate came into effect only after mid 2018, prior to this there was no such restriction as such and therefore mutual funds would move across various caps as per their wish without any concern for mandate.


Therefore even an investor investing in a large cap fund could get higher exposure to mid and small cap stocks.


Investors now know what they are getting into and even AMC’s need to work within the purview of the mandate laid down for respective categories.


A fund house cannot have more than one fund in the same categories.


A flexi cap fund is the most flexible equity fund since it is not bound by any cap whereas a thematic and sectoral fund can be said to be the most restricted since they can invest only in companies that fall within the sector or theme.


Stocks are classified as large, mid and small by AMFI once every 6 months and AMC’s accordingly need to take cognizance of the same.

 


Are you investing in the right mutual funds?

 



Equity mutual funds taxation

Taxation for equity mutual funds can be better understood by bifurcating it further into LTCG and STCG

 

LTCG

Long term capital gains tax also known as LTCG is charged on equity mutual funds when the profits from equity mutual funds held for more than a year are more than 1 lakh.


The LTCG rate is 10%.


Capital gains up to and under 1 lakh are exempted for taxes.


When calculating LTCG there is no benefit of indexation.

 


STCG

Short term capital gains or STCG is charged on gains from equity mutual funds which are held for 12 months or less.


The STCG rate is 15%.


There is no ceiling benefit in STCG like the 1 lakh ceiling in LTCG.


It is charged on from Re 1.


 

Taxation on international equity mutual funds

International equity mutual funds are treated as debt funds for tax purposes.


A 20% LTCG is charged on gains from International mutual funds that have been held for more than 36 months.


STCG is charged on gains from International mutual funds that have been held for less than 36 months.


The STCG is added to your income and taxed as per your income tax slab.

 

 

Are you investing in the right mutual funds?




Securities Transaction Tax

STT of 0.001% is charged on the sale of equity mutual funds.

 

 

Stamp Duty

From July 1, 2020 onwards a stamp duty of 0.005% is deducted on the investment amount of mutual funds for any transaction executed on or after July 1 2020.


This is applicable on:

  1. Purchases
  2. Dividend Reinvestments
  3. Systematic Investment Plan (Inclusive of running SIP’s registered earlier)
  4. Systematic Transfer Plan
  5. Equity as well as Debt schemes

 


Additional reading: Click Here to read about why you should not invest in mutual funds based on past returns



Equity mutual fund returns

Irrespective of what category of mutual fund you invest in, returns from mutual funds is not guaranteed.


Returns from equity mutual funds can vary drastically depending mostly on the category you have invested it.


Within the category too, the difference between the fund with the highest return and lowest return can vary largely since every fund within the same category despite the same mandate can adopt different strategies.


It is often said the funds with the highest risk also hold the potential for high returns but that is a very narrow approach.


It is one thing for a fund with high risk to also hold potential for high returns but completely another for you to be able to withstand the volatility such high risk/high return funds carry.


As much as high returns is why you start investing in mutual funds, not returns but goals should be ultimate goal for which you need your portfolio to be aligned with your goals.


High risk or low risk, high returns or low returns, at the end of the day what truly matters is how well constructed and managed your mutual fund portfolio is.


This is because you never invest in just one mutual fund scheme, you have a proper well diversified and balanced portfolio that consists of various schemes.


Failure to do so would result in several issues like constant chopping and changing which in turn would result in taxes, exit load charges, not being able to fully utilize compounding benefits and so on.



      Equity mutual funds, specifically the SIP mode of investing in them is a great way to convert your money into long term wealth and accomplish your long term goals.


  India even today does not have a sizeable population investing in them and even the ones doing so are going about it with half baked knowledge and on the advice of those who themselves are not well versed with mutual funds.

    

    This poses a risk to all those involved, too many cooks spoil the soup and there is a heightened need for the average retail mutual fund investor to seek professional advice which imparts healthy checks and balances.

 

 

For portfolio enquiriesemail us with your doubts at info@themutualfundguide.com



Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.  
Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing


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