An equity mutual fund is a type of mutual fund that primarily invests in the stocks of various companies. As per SEBI Mutual Fund Regulations, 1996 an equity fund must invest at least 65% of the scheme’s assets in equities and equity-related instruments. Equity-oriented funds are categorised based on sectors, market capitalisation and investment style based on the underlying securities. Whether an investor wants to invest in a few particular stocks or a particular sector, take a high or low risk or earn income or capital appreciation, equity funds are designed to cater to a variety of investors., making equity funds very popular.

Equity mutual funds are pooled investment vehicles that invest the funds of investors in the companies' stocks. These investments are managed by a fund manager, supported by a team of analysts. The selection of investments depends on the fund's category and its risk appetite. Some equity funds, such as index funds, simply track and invest in the securities of a particular index, in which case the selection of securities does not involve the fund manager. The movement in stock prices directly influences the fund’s returns, as it impacts the fund’s Net Asset Value (NAV). Investment in equities through mutual funds tend to offer an opportunity for long-term wealth creation, as capital appreciation in equities generally requires a long-term holding period.

The types of equity funds are categorised based on the following factors:

Market Capitalisation

Large-Cap Equity Mutual Funds -

As per SEBI guidelines, these funds invest at least 80% of total assets in companies that rank 1 to 100 in terms of full market capitalisation and are known for their potential to offer stability.

Mid-Cap Equity Mutual Funds -

As per SEBI guidelines, these funds invest at least 65% of total assets in companies that rank from 101 to 250 in terms of full market capitalisation. These funds may offer better growth potential in comparison to large-cap stocks.

Small-Cap Equity Mutual Funds -

As per SEBI guidelines, these funds invest at least 65% of their total investible corpus in companies that rank above 250 in terms of full market capitalisation. These funds may offer returns but are risky.

Large-and Mid-Cap Equity Mutual Funds -

These funds invest in a mix of stocks of mid and large-cap companies to aim to get the best of both. As per SEBI guidelines, the allocation to both is a minimum of 35% of each of the total asset values.

Multi-Cap Equity Mutual Funds -

These funds invest 65% of total assets in equity & equity related instruments across all market capitalisations - small, mid and large. These funds are for investors who do not want to be restricted to a single market cap and want to seek exposure across the market.

Tax Saving Mutual Funds -

Equity-Linked Savings Scheme (ELSS) is an equity-oriented mutual fund type that invests 80% of funds in equity and equity-related securities. It is popularly known as tax savings mutual funds. These tax-saving funds are designed to offer the dual benefit of tax saving and capital appreciation. Investing in ELSS qualifies for deduction under section 80C of the Income Tax Act, 1961. This deduction can be claimed under the old income tax regime.

Type of Investment

Equity funds with the option of investing only in companies of a particular sector or in a particular theme are termed sectoral funds or thematic funds, where they invest a minimum of 80% in equity & equity-related instruments of a particular sector/ particular theme.

Some funds replicate Nifty50 or other indices, these are called index funds.

Fund Management style

Based on how the fund is managed, the equity fund types can be active or passive. In the case of active funds, the fund managers handpick the funds and rebalance the allocation to meet the fund objective. In the case of passive funds, the fund managers track a market index with a fixed list of stocks it invests in and hence have little to contribute.

Equity funds can be invested through the Direct Plan (direct method) or Regular Plan (regular method). Under the Direct method, the investor can buy directly from the AMC. If the investor opts for the online option, the investor must complete the KYC process online and create an account to transact. The investor can carefully choose a suitable equity mutual fund and invest directly in it. Equity funds can be invested through SIP* (Systematic Investment Plan), lumpsum, or both. Nippon India Mutual Fund offers multiple channels for investors to invest, such as mobile apps, website, and physical form. The process is simple and secure as the One Time Passwords (OTPs) are sent to the investor's registered email address and mobile number. Even payment options are many to ensure maximum convenience for the investor. An investor can also invest in equity mutual funds by submitting the completed form along with a cheque at the designated Investor Service Centres (ISCs) or Registrar & Transfer Agents (RTAs) of mutual funds.

Under the regular method, the investor invests through an intermediary like a distributor or financial advisor who assists the investor in the process of investing by submitting the documents to the AMC or RTA. Both methods can provide a level of convenience and security to the investor.

Direct Method can be opted by investors with experience and knowledge, while the regular method can be opted by new investors.

Equity funds are a popular category of mutual funds due to the potential benefits they may offer. The following are potential benefits of equity-oriented mutual funds:

• With equity funds, an investor can start small with a SIP as low as Rs.100. So even a first-time investor can easily invest
• Equity fund tend tooffer great convenience to the investor as investing, redemption, and transfer can be done easily through online channels that take just a few clicks.
• Equity-linked savings schemes may benefit the investor from tax saving while saving money and building long-term wealth as they are eligible for tax deduction under Section 80C of the Income Tax Act, 1961.
• Equity Funds are professionally managed by the fund manager, who tracks and allocates the funds to endeavour to meet the fund's objectives and has in-depth market knowledge.
• Equity funds have the potential to provide better returns than other asset classes in the long term and are inflation-adjusted as they are linked to the market.
• With equity funds, an investor can easily diversify between various equity funds that carry different levels of risks to reduce the risks.
• There is possibly a fund for everyone; whether you are a conservative investor or a risk taker, there is a fund that may meet your objectives.
• They may help the investor meet long-term goals while providing liquidity except funds with lock-ins. (Except for close-ended equity mutual funds),
• Equity funds can help in building a financially secure population, as with small investments, one may be able to build a good corpus.

Tax on equity mutual funds is applicable on the returns generated. The returns can be in the form of dividends and capital appreciation on redemption of mutual fund units (Capital gains). Dividends on equity funds will be added to the investor’s taxable income and taxed at slab rates. Capital Gains are taxed based on the period of holding. So, if the fund is held for less than or equal to 12 months, it will attract short-term capital gains that are taxed at a flat rate of 20%, irrespective of the slab rate of the investor. If the fund is held for more than 12 months, it will attract long-term capital gains at a rate of 12.5%. However, equity mutual funds tax on LTCG is exempt up to Rs. 1,25,000/- p.a.

Equity Mutual Funds have many options as they invest in companies that can be classified based on market capitalisation, sectors, etc. Investors must consider the following factors while investing in equity funds:

1.Investment goals -

The first step to investing correctly is recognizing the objective of investing. Is it to build wealth for retirement, save for a child’s education, or achieve a short-term financial target? Based on these factors, the allocation in equity funds can be made.

2.Time Horizon -

Based on the goal, the time an investor can stay invested in the fund is determined, and this helps identify the type of equity-oriented mutual fund to invest in. For example, if the goal is a retirement fund, the investment is typically growth-driven, meaning it focuses on equity funds with the potential for higher returns over a longer period. This is because retirement planning usually allows for a longer investment horizon, which can help mitigate short-term market fluctuations and benefit from the compounding effect of growth-oriented investments..

3.Risk Appetite -

Risk appetite refers to an investor’s risk tolerance. Does one want to play safe, or do they want to take risks? Since risk and returns are correlated, one must choose accordingly.

4.Fund Performance -

Within the selected category of funds, it is advisable for the investor to study the fund performance of the various funds against their respective benchmark. The other factor is that although the fund performance fluctuates and there is no guarantee of future returns, monitoring it across different market cycles will give the investor an idea of consistency.

5.Fund manager experience -

The fund manager's experience plays a crucial role in the performance of the funds.

6.Expense Ratio and Exit Load -

These are investment costs that impact the equity funds' net returns. The lower the expense ratio, the higher the returns from the fund. Similarly, some funds have exit loads that are charges of premature withdrawal from the fund. These must be looked at while investing.

7.Capital gains Tax on equity mutual funds -

As covered in detail above, the tax on returns from equity mutual funds depends on the holding period. Short-term capital gains (for a holding period of less than or equal to 12 months) are taxed at 20%, while long-term capital gains (for a holding period of more than 12 months) are taxed at 12.5% for gains exceeding ₹1,25,000/- in a financial year. Understanding these tax implications can help investors plan their investments more effectively..