Equity Funds can be defined as a type of mutual fund that primarily invests in equity stocks. In India, with respect to the current SEBI Mutual fund Regulation, equity Mutual funds must, as a matter of fact, invest 65% of the fund’s assets in equity related instruments.
Equity Mutual fund enjoys a specific advantage in terms of the tax regime. Equity Funds can be passively or actively managed and are categorized according to investment style, company size, and geography.
BENEFITS OF INVESTING IN EQUITY FUNDS
The following are some of the benefits of investing in Mutual funds;
- Professional management: When it comes to investment management, equity fund is one of the few Mutual funds that parade professional fund managers. These professional fund managers are always making research with a view to keeping track of the market. In addition, they know the appropriate time to buy or sell stocks in order to make mouth watery returns. They also analyze a company’s performance before investing your money in their stocks. To this end, you are guaranteed that your money is in safe hands.
- Higher returns: Equity Mutual fund generate a higher return in terms of Recurring Deposits, Fixed Deposits, among others.
- Diversification: Diversification is one of the greatest benefits offered by equity Mutual fund. You have the opportunity to invest in a wide range of assets, hence if one investment is not doing well, the other will balance it out. In order to reduce your risk, you can invest I other type of mutual funds.
- Convenience: Investment in equity has been made hassle-free. Most fund houses have moved the investment process online. You can monitor your investment from the comfort of your home or office. What’s more? Even the KYC process can now be done online, all you need is a stable internet connection.
- Low cost: Investment in equity fund doesn’t necessarily mean you must break a bank. With Rs 5,000 you can start investing. Also, there is no payment of extra charges to agents or distributors.
- Disciplined investing: In order to cultivate a good investment habit, equity fund has what is know as Systematic Investment Plan (SIP). SIP will enable you small amount either weekly, monthly, quarterly or yearly. The SIP will be programmed in such a way that the amount to be invested will be automatically debited from your bank account instead of manual investment each time.
HOW DO EQUITY FUNDS WORK
The way equity fund works are that 60% of its funds are invested in equity shares of companies in different proportions with respect to its investment plan. The investment might be basically a large-cap fund or a mixture of market cap. Also, the investment style can either be growth oriented or value oriented.
Once a certain amount has been allocated to equity, the other percentage may be used to invest in the money market or debt. This is as a result of a redemption requests made by investors. The professional fund managers will keep buying and selling stocks in order to benefit from the dynamics of the market.
The frequent buying and selling of stocks would affect the expense ratio of the equity funds. As of now, SEBI has fixed the expense ratio upper limit at 2.5% and there are plans to bring this figure down. When the expense ratio is low, investors will benefit greatly.
TYPES OF EQUITY FUNDS
There are several types of Equity Mutual funds based on sector and themes, market capitalization, and the style of investing.
- Based on sector and themes: These are equities that concentrate their investment on a specific investment type or sector. Sector fund are those that focus their investment in a specific industry like Pharmacy, technology or FMCG. On the other hand, Thematic funds are those that follow a particular theme such as international stocks or emerging consumers companies.
- Based on Market Capitalisation: under this category, the types of equity funds available are; Large-cap equity funds, mid-cap equity fund, and small-cap equity fund. The Large-cap equity funds primarily focus investment on large Capitalisation stocks. Large-cap firms are typically big-time companies that drive the economy. Mid-cap equity funds are those funds that invest primarily in mid-size companies, while small-cap equity funds are funds that invest primarily in small businesses.
- Based on investment style: All the aforementioned types of equity Mutual funds follow a particular active investment style, although the fund managers would modify the investment to align with the market as the case may be. However, there are some equity funds that don’t follow this trend but follow a particular index. Index funds are those equity Mutual funds that follow a specific index
HOW TO INVEST IN EQUITY FUNDS
Investment in equity Mutual fund can be done in the following ways:
- Offline investment with the fund house: Offline investment is the physical location of the fund house closer to you. When going to the investment house, ensure you are handy with the following documents
- Proof of Address
- Proof of Identity
- Canceled Cheque Leaf
- Passport Size photograph
When you get there, you will fill out an application form and then submit all the above-listed documents.
- Offline investment via a broker: A broker is someone licensed to assist you with the investment process for a fee. The broker will guide you on which fund to buy or sell. The broker’s fee will be charged from your total investment amount.
- Online through the fund’s website: Investing in the equity market has been made easy with the introduction of the online facility. Most fund houses now accept online processing of investment. All that is required of you is to follow instructions, fill the forms correctly, and then submit the form for processing. The KYC process can also be done online after entering your PAN and Aadhar numbers. There would be verification after which you can then start investing. The online method of investing in equity funds is preferred by most investors because it is simple, quick, hassle-free, and user-friendly.
- Through an App: It is now possible to invest in Equity funds using a mobile app. Most fund houses have developed their various mobile apps that would enable individual investor to download and start investing. Investors can view their account statement, buy or sell units, and lots of other activities. The following are some of the fund houses that have adopted mobile app:
- SBI Mutual Fund
- Axis Mutual Fund
- ICICI Prudential Mutual Fund
- Aditya Birla SunLife Mutual Funds
- HDFC Mutual Funds.
TOP EQUITY MUTUAL FUNDS TO INVEST
|Fund Name||One year returns||Three years returns|
|Reliance Top 200 Fund||9.75%||14.26%|
|Reliance Vision Fund||6.40%||7.67%|
|HDFC Growth fund||13.71%||12.74%|
|ICICIC Prudential focused Bluechip equity fund||14.86%||12.12%|
|Invesco India dynamic equity fund||13.85%||11.63%|
|Sundaram select focus||16.28%||11.17%|
|ICICI Prudential top 100 fund||7.46%||10.78%|
|UTI top 100 funds||9.03%||9.42%|
|SBI Bluechip fund||12.09%||12.17%|
|HSBC equity fund||13.39%||11.55%|
EQUITY FUNDS REGULATIONS
The essence of regulating the equity market cannot be overemphasized. This is because Regulation would protect the interest of both the investors and fund managers. In India, all types of mutual funds are duly regulated by the Indian Securities Exchange Board. However, the Unit Trust of India (UTI) is not captured under the Securities Exchange Board Regulation of 1996. The reason is that UTI was created and passed by an Act of the Indian parliament. It is worthy to mention here that all equity funds must be licensed by SEBI.
SOME SEBI REGULATIONS FOR EQUITY FUNDS
It is expected that Equity funds must establish AMC with 50% independent custodians, independent directors, as we as a separate board of trustees to ensure a good relationship between fund managers, trustees, and custodian. Since the management of the funds is the sole prerogative of the AMCs, there exists a counterbalancing of risks.
The role of SEBI is to keep the sponsor’s track record, financial soundness, and the integrity of business transaction while granting permission. SEBI also vets the particulars of the funds. It is required that the funds must adhere to some advertisement codes.
With respect to the guidelines of SEBI, all the equity fund houses must be inspected on a yearly basis to ensure that they comply with laid down rules and regulations.
EQUITY FUNDS INVESTMENT RISKS
Despite the numerous benefits of investing in the equity market, there are some inherent risks associated with the market. The risks are as follow;
- Market risk: Due to certain events like global/regional economy instability, interest rate fluctuation, currency, and market conditions, among others, the income generated by the fund houses may decline. This means that the investors who invested in the scheme will lose money.
- Credit risk: This is when the fund houses cannot meet their financial demands.
- Interest rate risk: This risk is when the interest rate of an investment changes due to market forces.
TAXATION OF EQUITY FUNDS
When equity funds unit are redeemed, the investor will earn a profit. These profits are taxable. However, the taxes are with respect to the number of years (holding period) you have been investing.
Any profit made with one to twelve months are taxed at the rate of 15%. Similarly, profit after 12 months is taxed at the rate of 10%.
PERFORMANCE OF EQUITY MUTUAL FUNDS
Equity fund is one of the best Mutual funds that generate high returns. Diversification is one of the greatest benefits offered by equity Mutual fund. You have the opportunity to invest in a wide range of assets, hence if one investment is not doing well, the other will balance it out. In order to reduce your risk, you can invest I another type of mutual funds.
Equity fund on the average has delivered more than 10 to 12 percent before tax return. These returns are subject to fluctuation based on Market conditions, as well as economic conditions.
It is important that you carry out a due diligence before settling for an equity fund. Hence, you have to study the activities of the activities and possess knowledge of qualitative and quantitative factors.