Equity Mutual Funds
What are Equity Mutual Funds?
An Equity Fund is an open or close fund that invest primarily in stocks, allowing investors to but into the fund and thus buy a basket of stocks more easily than they could purchase the individual securities.
The fund manager tries to offer great returns by spreading his investment across companies from different sectors or with varying market capitalizations. Typically, equity funds are known to generate better returns than term deposits or debt-based funds. There is an amount of risk associated with these funds since their performance depends on various market conditions.
Benefits of Equity Mutual Funds
Low Expense Ratio
In Equity Fund, regular buying and selling of shares can lead to an increase in the expense ratio of the scheme. The Securities and Exchanges Board of India (SEBI) has created an upper limit for the expense ratio of equity funds at 2.5%.This means more returns for investors.
Tax Exemption under Section 80C
The Equity Linked Savings Scheme or ELSS offers tax exemption under Section 80C of the Income Tax Act with exposure to equity. It has a small lock-in period of 3 years and offers great potential for earning good returns. You can also invest in an ELSS in installments
Portfolio
Diversification
Unlike FDs, Debt Funds do not offer assured returns, nor do they guarantee the principal amount as they are subject to market risks (interest risk and credit risk). However, in most cases the pre-tax returns compares attractively to the bank deposits and post-tax returns are even better because they benefit greatly from taxation in the long run (and indexation post 3 years).
Mutual Funds as per SEBI classification
Market Capitalization
based Categorization
Investment Strategy
based Categorization
Large Cap Funds
Invest at least 80% in large caps
Multi Cap Funds
Invest at least 65% in equities & no market-cap wise restriction
Mid Cap Funds
Invest at least 65% in mid caps
Small Cap Funds
Invest at least 65% in small caps
Theme and Sectoral funds
Equity Fund might decide to follow a specific investment theme like an international stock theme or emerging market theme, etc. Also, some schemes might invest in a particular sector of the market like BFSI, IT, Pharmaceutical, etc. Here, it is important to note that sector or theme-based funds carry a higher risk since they focus on a specific sector or theme.
Focused Equity Fund
ELSS Tax Saver Funds
Invest in Equity and offer tax exemption under 80C
Sectoral Funds
Invest at least 80% in chosen sector stocks
This fund invests in a maximum of 30 stocks of companies having market capitalization as specified at the time of the launch of the scheme.
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