Equity mutual funds, also known as growth funds, invest in the stocks of different companies. You can invest in equity mutual funds in two ways: lumpsum or systematic investment plan (or SIP). The chosen investment scheme and resulting market movements, whether gains or losses, will affect the fund's Net Asset Value (NAV).
Hence, it is important to be cautious and invest in funds only after proper research and ensuring the fund aligns with your financial goals.
In this article, we will understand what equity mutual funds are, how to invest in equity mutual funds, and their benefits and tax implications.
What are equity mutual funds?
An equity mutual fund, also known as a growth fund, pools money from various investors and invests it in equity stocks of different companies and sectors. Equity mutual fund investments are generally considered high-risk since they are directly linked to market fluctuations. Depending on the financial objective of an investor, equity mutual funds are of different types that invest in small-cap, mid-cap, or large-cap companies.
Equity mutual funds are managed by professional fund managers whose main aim is to maximise profits for their investors, either through capital appreciation or periodic dividends.
After a significant portion of the funds have been allocated to equity, fund managers also invest a certain proportion of the fund in debt securities and money market instruments to bring down the risk quotient and have some liquidity if the investor wishes to redeem their investment.
Why invest in equity mutual funds?
Equity mutual funds provide an easy and convenient way for investors to participate in the stock market without directly trading in individual stocks or shares of a company. The collective pooling of funds from various investors allows for diversification. As a result, the fund gets access to a wide variety of companies across different sectors.
Due to this diversification, risk is mitigated, and a crash in any individual company’s stock does not harm the fund's overall performance.
Are you searching for the best mutual funds? Check out these different mutual fund categories for smart investing!
How to invest in equity mutual funds?
Here are the steps you need to follow to invest in equity mutual funds:
1. Open a Demat and trading account
You first have to open a Demat account with a trusted bank or brokerage firm. A Demat account is helpful for storing shares in an electronic form. A trading account, on the other hand, helps you sell those shares.
2. Choose an equity fund
There are various equity mutual fund schemes available in the market. Decide and select the fund that is right for you based on your investment objective, preferred risk-return balance, and maturity horizon.
3. Invest in the equity fund
You can invest in a fund that suits your requirements through a reputed mutual fund house, a brokerage firm, or a public or private bank. You can invest either in one go using the lumpsum method or opt for regular periodic payments in the form of a SIP.
4. Monitor your investment
Once your investments are made, regularly monitor, track, and review the performance of the funds you have invested in to ensure that they are in alignment with your financial ambitions.
How are equity funds performing in India?
Equity mutual funds in India have, in the past, delivered higher returns than any other mutual fund category. The value of equity mutual funds fluctuates depending on several factors like prevalent economic conditions, market sentiment and movements, and other global factors.
Hence it is advised to thoroughly research past performance and trends of equity mutual funds and match them with your financial goals before investing. It is also an added advantage if you possess knowledge about the stock markets, as it will come in handy when analysing different schemes and other qualitative and quantitative factors.
What are the benefits of investing in equity funds?
Equity mutual funds are good financial instruments for investors looking to build wealth. Here are some of the benefits these funds provide:
1. Professionally managed
Equity mutual funds are managed by professional fund managers who are quite experienced and generally hold a good track record of selecting the right mutual fund schemes and managing portfolios. As a result, you do not have to be directly involved in curating and monitoring your investments day in and day out.
2. Diversification
Equity mutual funds invest in a vast majority of industries and sectors, which allows you to diversify your holdings across a variety of high-performing and promising stocks. Since you do not put all your eggs in one basket, your risk is reduced, and your portfolio is protected from the volatility of any given sector or industry.
3. Liquidity
Equity mutual funds in India are quite liquid and have the option to be redeemed at any time on a given business day at the prevailing net asset value. This characteristic of equity mutual funds is particularly helpful when you require money in the short term.
4. Easy on the pocket
Investing in mutual funds does not put any financial pressure on the investor, as you have the option to invest in a scheme with an amount as low as Rs. 100 (through SIPs). Apart from that, you also have the option to invest lump-sum or through SIP, which can be weekly, monthly, or quarterly, depending on your financial preferences.
5. Capital appreciation
Growth equity funds help you beat the market volatility of equity through rupee-cost averaging. They also have the potential to provide you with returns that can beat inflation. An individual can build long-term wealth by investing in equity funds.
Tax benefits of equity funds
Here is how equity mutual funds are taxed in India:
1. LTCG taxation
- Applies at 12.5% on capital gains exceeding Rs. 1.25 lakh from equity-oriented mutual funds or equity shares.
- No indexation benefit is provided.
Read more about long term capital gains tax.
2. STCG taxation
- Imposed at 20% on investments in equity funds.
- Applicable if the seller pays a Securities Transaction Tax (STT) of 0.001%.
Read more about short term capital gains tax.
3. Holding period
- LTCG: Investments held for more than 12 months qualify.
- STCG: Investments held for less than 12 months qualify.
4. ELSS funds
- Feature a mandatory lock-in period of 3 years, during which redemption is not allowed.
- Serve as a tax-saving option under Section 80C.
5. Dividends
- Taxable in the hands of the investor.
- The dividend tax rate is 15%, regardless of the investor's income tax bracket.
Conclusion
Investing in equity mutual funds is an attractive option for many investors to grow their wealth in the long term. Apart from being professionally managed, liquid, and easy on the pocket, these financial instruments also provide benefits such as diversification and capital appreciation.
However, it is important to research and understand market forces well before making any investment decision in equity mutual funds.
