equity_funds

An equity mutual fund is a variety of mutual funds where the portfolio manager invests the money collected from the buyers in equities of listed corporations. The portfolio of an equity-oriented mutual fund consists of at the least 65% investment in equities or equity associated instruments.

(Quick note: An equity investment usually refers back to the buying and holding of shares of stock on a stock market by individuals and corporations in anticipation of earnings from dividends and capital gains.)

Equity funds might be both the normal mutual fund variety or it could possibly come in the form of ETF (Exchange Traded Funds).

The ETF trades within the stock exchange like an equity share, throughout the day. A standard equity mutual fund, however, settles once in a day, the place the purchase and sell orders are netted after market hours for the computation of the Net Asset Value or NAV.

“Mutual funds were created to make investing easy, so consumers wouldn’t have to be burdened with picking individual stocks.” – Scott Cook

Different kinds of Equity Funds

Equity Funds might be labeled into the following categories that are consisted of a number of sub-categories as follows:-

Based on market capitalization:

  • Large Cap Equity Funds: spend money on corporations having giant market capitalization.
  • Mid Cap Equity Funds: spend money on corporations having medium market capitalization.
  • Small Cap Equity Funds: spend money on corporations having small market capitalization.
  • Micro Cap Equity Funds: make investments corporations having market capitalization lower than that of companies with small market capitalization.

Also learn: Reasons Why You Should Start a SIP right away?

Based on the type of investment:-

  • Private Equity Funds: spend money on corporations that aren’t listed in any stock market.
  • Equity Income Funds: spend money on equities of corporations which pay a major dividend.
  • Dividend Growth Funds: spend money on equities of corporations having a report of accelerating dividends per share (DPS) at a rate much faster than your complete stock market.
  • Index Equity Funds: mimic an index like Nifty.
  • Sector or Industry Specific Equity Funds: monitor particular areas of the economic system of India like several business or sector.
types of equity funds

Image source: sipfund.com

Equity Mutual Fund: How does it work?

how mutual funds work

Image source: Corporatefinanceinstitute.com

Mutual funds issue units to its buyers in response to the amount of money obtained from the latter by the former.

The assets of the mutual fund are often called a portfolio which is managed by the Asset Management Company or AMC by the certified fund managers. The worth of every unit of a mutual fund is known as the Net Assets Value (NAV) of the mutual fund. As the stock prices keep repeatedly adjustments, the fluctuations within the value of the portfolio leads to the fluctuation of the value of the units.

The AMC provides various products of mutual funds referred to as schemes, structured in a way to go well with the necessities of the unitholders. A portfolio statement, income account, and balance sheet can be found for each scheme.

(Also learn: 23 Must-Know Mutual fund Terms for Investors.)

Calculation of NAV of Equity Mutual Funds

NAV of a fund is used as a parameter to evaluate the performance of the same. It is referred to the market value of the investments held by the scheme deducting liabilities and dividing the result by the variety of units issued under the scheme.

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Suppose, the market worth of all investments held with respect to a mutual fund scheme is Rs. 100 lakh and 10 lakh units have been issued to the unitholders. In this case, the NAV per unit comes to Rs. 10.

NAV Mutual funds

Source: Moneycontrol

Which is one of the simplest ways of investing in Equity Funds?

The only method of investing in an Equity Mutual Fund scheme is through SIP or Systematic Investment Plan.

An investor often invests monthly in a SIP. SIPs give the good thing about rupee-cost averaging. So when the markets go up, an investor finally ends up getting fewer units.

Again, when the markets are bullish, an investor is rewarded with extra units in the same amount. Investing by SIP makes investing an everyday habit for investors.

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Buy and read – Equity Mutual Fund

How to analyze the efficiency of an equity mutual fund?

  • Having a look at the price of investment as reflected by the expense ratio and exit load.
  • Checking whether or not the turnover ratio of the underlying portfolio isn’t too high.
  • It is to be checked whether or not the investor’s investing technique or philosophy matches with that of the fund manager.
  • The underlying portfolio needs to be broadly diversified so to gain the benefit of risk reduction.
  • Comparing a previous couple of years’ returns of the fund under evaluation with that of its peers. Risk-adjusted returns need to be the perfect basis for comparison.
  • Alpha and Beta of an equity fund needs to be given emphasis. Alpha measures the additional percentage of returns generated by the equity fund as in contrast with the benchmark returns. Beta offers the magnitude of risk of a fund i.e. the variability of returns of the fund about its expected return.
  • An equity fund managed by a number of fund managers for a long period is preferred less in comparison with one which is managed by the same person for the same period.
  • A potential investor is required to verify the quality of shares within the portfolio because the latter drives the return of the fund in the future.

How to find out the taxation of equity funds in India?

For the financial year 2017-18, no long-term capital gain (for items held for 1 year or extra) is charged for both Resident Indians and NRIs.

On the opposite hand, short-term capital gain (for items held lower than 1 year) is charged @ 15%. The TDS fee applicable to the NRIs for the redemption of equity oriented funds is 15% and the same is relevant only for short-term capital gain.

The dividend obtained by an investor for an equity fund is totally tax-free in the hands of the former. As per the Finance Act 2018, the long-term capital achieve of over Rs 1 lakh will appeal to tax @ 10% and no indexation profit will be allowed.

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