What is equity mutual fund learn in next 5 minutes

With decreasing interest rates of fixed deposits, I frequently get inquiries like what is an equity mutual fund.

If you are one of them, your concern is absolutely right.

Inflation is increasing with more pace than your money in fixed deposits.

So, it is always better to look for alternatives that can actually create wealth over the long term.

Equity is a very good investment option. In India equity market has grown more than CAGR of 12% in last 40 years.

Now, isn’t it amazing and interesting to know about it after knowing its superb returns ?

We will see everything in detail on equity mutual funds.

By the end of the article, I am confident that you will be crystal clear about equity mutual funds.

Even you will start picking on your own, which equity fund is right for you .

So, What is equity mutual fund

First of all, you should be knowing what a mutual fund is

Mutual fund is basically a big pool of money collected from many investors like you.

This money is invested in various assets like the equity market, debt market and gold.

Money is invested by experienced fund managers.

So, you get the benefit of their expertise, which you may not do on your own if you do not have an idea about it.

Same way, an equity mutual fund is one type of mutual fund that makes a pool of money from many investors and invests in the equity market.

There are main 5 types of equity mutual fund is divided in many subtypes

Large cap fund

In this type of equity fund, money is invested in only large cap stocks

Large cap stocks are those stocks which rank in the top 100 of all listed stocks on stock exchange.

To make it easy, all big companies like SBI, Reliance, TCS , HDFC Bank, ICICI Bank, these are all large cap stocks.

As the name suggests , they are large companies, so they provide better stability and lower risk.

Lower risk is followed by lower returns because they are already too large , so they grow steadily over the years.

Mid cap fund

In this type of mutual fund, money is invested in companies that rank from 101 to 250 on stock exchange.

They have more room for growth and possibilities of becoming large cap in future.

They are more volatile and risky than large caps , and as they have more room to grow, they provide better return with more risk than large caps.

Small cap funds

Small caps funds invest in all small companies that rank beyond 250 on stock exchange.

They are small in size so they have maximum room to grow and provide superior returns over the years if they grow big in future.

But as their size is small they definitely face more challenges than large caps, that’s why they are highly volatile.

This thing is highly risky for a short term horizon.

In worst phase small cap funds may even lose your capital by 30 to 50%

If your investment horizon is 10 to 15 years, then only you should invest in small caps.

Because in an economic boom these stocks highly outperform large caps and provide you superior returns.

Multi cap funds

If you are not sure about your risk appetite, Then go for a multi cap fund.

As the name suggests, in this type of fund, your money is invested across all stocks like large, mid and small caps.

This fund is designed to get maximum benefit across all companies. It provides more balance against volatility.

These are very simple forms of equity mutual funds.

If you see the news, you might have definitely heard names like sensex and nifty.

In this fund money is invested directly in the same stocks of sensex or nifty index.

So, you would get a similar return of what sensex or nifty is growing.

Which is also not bad seeing performance of senses over the past 40 years.

So far, from this information here, I hope equity mutual fund meaning is clear.

What is equity in mutual fund?

I think you might be having little idea that equity mutual funds mean mutual funds that invest in the equity market.

But what is equity ?

In simple language , we can say equity means the value of stocks.

In equity mutual funds, money is invested in the stock market.

And as we know stock markets are subject to volatility risk in the short term.

But as the time passes, the stock market performs better as the economy of the country grows.

In the short term stock market remains volatile.

You might already be aware about it. And this is the major fear among investors of losing their money.

Well, It is fair to have this fear, after all you have hard earned money that you wish to grow to fulfill your dreams in future.

But, if you see the long horizon of equity performance, it averages to 12 percent per annum, which is way higher than inflation.

You should just pick your suitable equity mutual fund as per your risk appetite.

For example, You can go with large cap funds or multi cap funds if you are not comfortable with equity market volatility and your investment horizon is small like 3 to 5 years.

There are many examples of best equity mutual funds for long term.

In this post I will not talk in detail about particular products but, personally, Axis blue chip fund , SBI small cap funds are my favorite funds for the long term.

You can search its returns over the long term.

How does equity mutual fund work

Equity mutual funds are managed by professional fund managers.

You can invest in equity mutual funds after completing your KYC.

You can refer to my post, If you do not know about how to do KYC.

Once your KYC is registered, you can either invest in a lump sum amount, with minimum lump sum amount of 5000 rupees.

Or you can start with an SIP of minimum 100 to 500 rupees in equity mutual funds.

Once you make the payment, you will be allotted Folio number and mutual funds unit in it.

Everyday value of those units will change as per stock market volatility of the day.

If you believe me, once you have started investing, you should stop seeing its daily value to be happy and make better returns in the future.

You should just review the performance of your fund every 3 months or 6 months but not on a daily basis.

As i said before Equity mutual fund performance is good over the long term. Any type of mutual fund has potential to make your money double in 3 to 7 years.

Are equity mutual funds safe?

Equity mutual funds are completely safe if you studied it properly before investment.

If you ask about regulatory safety, Equity mutual funds in India are managed by SEBI.

SEBI has a very good reputation as a watchdog over the stock market and it is working very well to safeguard investors interests.

If you talk about safety of mutual fund companies, you can go with good brand name, past performance, and fund managers.

There are many top equity mutual fund brands in the market, like SBI, AXIS, HDFC, ICICI, Nippon.

Even Though past performance of an equity fund may not sustain in the future, it is good to check it to know the quality of fund and fund managers.

If you talk about safety against volatility, it is completely in your hand, which fund you are picking as per your risk appetite and your investment horizon.

All about Equity mutual fund taxation

This is the last but important query about equity mutual funds. How equity mutual funds are taxed?

From a tax point of view , In every transaction of equity mutual funds STT(Security transaction tax) is charged, which is 0.01%. You do not have to pay it directly.

Tax liability on capital gain on a mutual fund is divided in 2 types.

  1. Short term capital gain tax : It is 15% tax you have to pay on your capital gain if you are withdrawing an amount with gain in less than 3 years.
  2. Long term capital gain tax: It is 10% tax you have to pay on capital gain if you are withdrawing an amount with gain after 3 years.

In both cases you are liable to pay tax only on capital you gained above 1 lakh rupees. If your capital gain is less than 1 lakh rupees, you need not to pay tax.

Dividend gained by an investor on any mutual fund is tax free in the hand of the investor.

You can also save your income tax by investing in an ELSS scheme of mutual fund and claim upto 1.5 lakh rupees in a year under section 80c of income tax.

Now, a question may arise,

What is difference between ELSS and equity mutual fund .

Full form of ELSS is equity linked savings scheme. It is just another equity mutual fund with the same investment strategy of an equity fund.

Only difference is it provides tax benefit under govt guidelines. To avail it, all ELSS mutual fund scheme has lock of 3 years. In any case, you can not withdraw an amount from it within 3 years, while in other equity mutual funds you can withdraw your money at any time.

Conclusion

Equity mutual funds are very promising, safe investment options over the long run. I have almost explained everything you need to know before starting your investment journey.

What do you think about equity mutual funds now? You can let me know in the comment or feel free to connect with me.

Originally published at https://yashpalsinh.com.

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Yboradhara

Finance planner with experience in Equity market, Mutual funds and Insurance