Equity Mutual Fund

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21 Aug, 2024

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An equity mutual fund is a type of mutual fund that invests its assets generally in stock or shares of various companies for the long term to benefit the investors. They are also known as growth funds as they provide better returns to investors than bank deposits or debt funds.

An equity mutual fund is open-ended, just like a mutual fund that allows investors to own the business through shares or stocks. It is useful for the growth of investors' wealth. However, these funds do not invest in bonds. So, they are a bit risky for investors because they depend on the performance of stocks/shares and the conditions of financial markets.

What is Equity Mutual Fund?

Equity mutual funds are a category of mutual funds that invest in shares or stocks of various companies to benefit investors. They are long-term financial instruments for growth in wealth and come with market risk but tax benefits.
These funds are based on market capitalization, geography, and investment styles like mega-cap, worldwide equity funds, and value funds.
Any fund held below 12 months attracts tax at the income tax rate, and long-term capital gains may attract a rate of around 20%.
Benefits of investing in these funds include - diversification, low capital investment, professional fund managers, any-time easy redemption, government-regulated safety, and tax relief to the investors.

Equity Mutual Fund Explained

The meaning of equity mutual fund or stock mutual fund is that it is a type of mutual fund that invests 60% of its total assets for the long term in the shares or stocks of different companies to help grow its wealth. These are diversified shares of publicly listed companies in one basket. These funds are an excellent investment option if investors' goal is capital appreciation. The fund does not invest in bonds of companies. The fund managers can either actively or passively manage these funds.

Here are some functions that the fund managers perform while actively managing the funds:

Perform the scanning of the securities market
Conduct in-depth research about companies' past performances
Assess the past and present performance of the stock or shares
Choose the best stocks or shares to build a high-yield portfolio of funds for the investors.

However, in the case of funds that fund managers passively manage, the managers are responsible for building a portfolio that reflects the most famous stock indexes like the New York Stock Exchange (NYSE) or National Association Of Securities Dealers Automated Quotations (NASDAQ) of the United States.

Moreover, these mutual funds are divided further into diversified & thematic or sectoral. In diversified mutual funds, fund managers invest in the shares or stocks throughout the full market range. In sectoral mutual funds, fund managers follow an investment theme and limit the investment to a particular sector like real estate, pharmaceutical, or IT. However, sector-based mutual funds carry a higher financial risk.

The main motive behind these mutual funds is to give long-term profit and provide the best services of professional fund managers and portfolio diversification to common investors. It does it through investments in the shares or stocks of many companies in different sectors or by equity mutual fund SIP.

Types Of Equity Mutual Funds

These mutual funds are categorized based on market capitalization, geography, and investment style.

Here are some bases on which these mutual funds are categorized

1. Market Capitalization-Based Mutual Funds

These mutual funds are also categorized based on strength, extent, and market capitalization range. It means that how much of the value of a company's total equity in the market act as a basis to divide the funds like –

i. Mega-Cap Funds

These invest in shares that belong to market leaders with the largest market value of more than $200 billion. An example includes Apple Inc.

ii. Large-Cap Funds

These invest in total assets or shares that belong to market leaders with a market value between $10 billion to $200 billion, like General Electric. These are more stable than the mid-cap and small-cap mutual funds.

iii. Mid-Cap Funds

These invest in shares that belong to market leaders with a market value between $2 billion to $10 billion, like Spirit Airlines.

iv. Small-Cap Funds

These invest in shares that belong to market leaders with a market value between $300 million to $2 billion, like Unisys corporation. These funds generate more returns than those discussed above but are highly volatile.

v. Micro-Cap Funds

These invest in shares that belong to market leaders with a market cap between $50 million to $300 million.

2. Geography-based Mutual Funds

These mutual funds are based on various categories of the region worldwide.

i. Global/Worldwide Funds

These have invested shares belonging to market leaders with a market value in any country, including the United States.

ii. International Funds

These have invested shares belonging to market leaders with the largest market value anywhere outside the United States.

iii. Country/Regional Funds

These have invested shares that belong to market leaders with the largest market value within a domestic market of a country like China.

3. Style Of Investment-Based Mutual Funds

These mutual funds use four methods/strategies for selecting stocks or shares - bottom-up, value, growth, and top-down.

i. Sector-Specific Funds

These are shares or stocks invested in companies that belong to a specific industry using a top-down strategy.

ii. Equity Income Funds

These are shares or stocks invested in companies that pay the highest dividend using a bottom-up strategy.

iii. Growth Funds

These are shares or stocks invested in companies with the best track record in profit-making and growth using a growth strategy on the belief that they will keep growing.

iv. Value Funds

These are shares or stocks invested in companies whose under-valued stocks or shares have the highest probability of exponential in the near future using the value strategy.

Example

Here is an example of the mutual fund Vanguard S&P (standard and poor) 500 Exchange-Traded Fund to understand the concept better.

Vanguard S&P 500 ETF (NYSEARCA: VFINX) is an equity mutual fund. It is a carefully designed portfolio of various shares and stocks of multiple United States companies by the Vanguard Group, Inc. As a result, it gives a good investment platform for investors with a broad-based exposure to the United States equity at an affordable price. It primarily tracks the S&P 500 index by investing in all the shares or stocks. In addition, it has low fees because the investment portfolio mimics the S&P 500, so the management manages it passively. The markets list many such similar funds.

Taxation

Many financial instruments attract taxes, like bank deposits. The mutual funds return from a taxable investment amount and are subject to capital gain taxes. However, tax on equity mutual funds is not deduced during their investment period. The taxes come into play in these funds upon stock dividends or redemption payout.

Those mutual funds, which are held for 12 months and less, attract rates of taxes equal to the income tax slab. However, whenever these mutual funds are held for more than a year, they attract a flat 20% federal long-term capital gains tax.

Benefits

Here are some equity mutual funds benefits:

These mutual funds mitigate the risk of investments by diversification.
They have a lower mutual fund expense ratio.
Anyone with low capital can invest in these funds. So, these funds are cost-efficient and convenient.
Professional fund managers/experts ensure good equity mutual fund returns and a good portfolio.
Open-ended mutual funds provide the option of a higher liquidity option. So, investors can redeem them at any time with small charges.
These mutual funds are quite transparent in their terms and conditions, so they are a less ambiguous form of investment.
Government authorities stringently regulate these mutual funds, making them the safest form of investment.
The scheme of these mutual funds also embeds tax benefits. One can opt for an equity mutual fund SIP (Systematic investments/installments).

Frequently Asked Questions (FAQs)

How to invest in equity mutual funds?

One can use online mediums like websites or mobile apps to invest in equity mutual funds, but one must ascertain providers' offers. After that, one must look for an affordable mutual fund with minimal underlying portfolio turnover, broad portfolio diversification, the best portfolio managers, and a proven provider track record.

Is equity mutual fund safe?

Even if equity mutual fund returns are higher, these returns come with a risk factor. Therefore, even the right mutual funds show fluctuations in the short term but give valuable returns in the long term. So, the investors must plan to invest for the long term in sync with their goals. These funds are safe if investors understand them before investing.

Is indexation applicable on equity mutual funds?

Indexation applies only to those equity mutual funds with a holding duration of 3 years or more, as long-term capital gains (LTCG) are only applicable to them. Consequently, debt mutual funds held for more than 3 years are available for long-term capital gains; hence, indexation applies to debt funds only.

Equity or debt mutual fund, which is better?

Equity mutual fund returns are more than debt-based or even term deposit returns. However, debt funds have investment goals of generating income, short-duration returns, and low risks. However, the only downside of a debt fund is the provision of short-term capital gains tax, unlike an equity fund.