Equity Mutual Funds

Equity mutual funds pool investors’ money to purchase shares of publicly listed companies. They offer diversified equity exposure, professional management, and ease of access, making them a cornerstone of long-term investing in India.

1. Definition and Structure

An equity mutual fund issues units to investors and invests the pooled corpus in a portfolio of stocks. A fund manager selects equities based on the scheme’s investment strategy (e.g., Large-cap, Mid-cap, Sectoral). Investors participate in gains (and losses) in proportion to their holdings.

2. Types of Equity Funds

Equity funds differ by Market-capitalization, Investment style, or Sector focus:

1. Large-Cap Funds
2. 1. Invest in the top 100 companies by market cap.
   2. Lower volatility; moderate growth.
3. Mid-Cap and Small-Cap Funds
4. 1. Target companies ranked 101–250 (mid-cap) or below 250 (small-cap).
   2. Higher growth potential; greater volatility.
5. Multi-Cap Funds
6. 1. Flexibly allocate across large, mid, and small caps.
   2. Balanced risk–reward profile.
7. Sector/Thematic Funds
8. 1. Concentrated bets on one sector (e.g., Banking, Technology) or theme (e.g., ESG, Infrastructure).
   2. High risk/reward; suited for tactical allocation.
9. Index Funds and ETFs
10. 1. Track a benchmark index (e.g., Nifty 50, Sensex).
    2. Passive, low cost, broad market exposure.
11. Hybrid Equity Funds
12. 1. Equity-oriented hybrid (≥65% equity) mixes debt and equity for moderate risk.

3. Advantages

• Diversification: Spreads risk across dozens to hundreds of stocks, mitigating single-company shocks.
• Professional Management: Seasoned fund managers and research teams handle stock selection, portfolio rebalancing, and compliance.
• Liquidity: Units can be redeemed at NAV on any business day (except ETFs, which trade intra-day).
• Systematic Investing: SIPs (Systematic Investment Plans) allow disciplined, rupee-cost averaging.
• Transparency and Regulation: SEBI-regulated disclosures, AMFI ratings, and daily NAV publication.

4. Risks and Drawbacks

• Market Risk: Equity markets are volatile. Short-term losses are common during corrections or bear phases.
• Manager Risk: Performance depends on fund manager’s skill. Manager changes can affect strategy and returns.
• Expense Ratio: Ongoing fees reduce net returns; high-cost funds must outperform benchmarks by the excess fee to justify the cost.
• Concentration Risk: Sectoral or thematic funds carry higher concentration risk if the chosen theme underperforms.

5. Taxation (Updated as of August 2025)

Equity Funds (≥65% equity allocation):

Capital Gains Tax:

• Short-term Capital Gains (≤1 year): 20% plus applicable cess (increased from 15% effective July 23, 2024)
• Long-term Capital Gains (>1 year): 12.5% on gains above Rs. 1.25 lakh per financial year, without indexation benefit (increased from 10% effective July 23, 2024)

Key Points:

• Exemption limit: LTCG up to Rs. 1.25 lakh per financial year is tax-free (increased from Rs 1 lakh)
• Aggregate limit: The Rs. 1.25 lakh exemption applies to combined gains from equity mutual funds and listed equity shares
• No indexation benefit: LTCG is calculated without adjusting the purchase price for inflation

Other Taxes and Charges:

• Securities Transaction Tax (STT): 0.001% on redemption value, applicable only to equity-oriented funds
• Dividends: Taxed at applicable income tax slab rates; TDS @ 10% if annual dividend exceeds Rs. 5,000
• Exit Load: Typically 1% if redeemed within 12 months; varies by fund

For NRI Investors:

• TDS rates: 20% on capital gains
• Higher tax rates may apply based on Double Taxation Avoidance Agreements with respective countries

Important Note: These revised rates apply to transactions executed on or after July 23, 2024. The holding period classification (short-term vs long-term) remains unchanged at 12 months for equity funds.

6. Selection Criteria

When choosing an equity fund, consider:

• Investment Objective & Horizon: Align fund type (large-cap vs. mid-cap) with your risk appetite and time frame (≥5 years for mid/small-cap).
• Past Performance: Evaluate 5 or 10 year rolling returns against benchmark and peer group (category).
• Expense Ratio: Prefer funds with Expense Ratio (TER) below category average.
• Fund Manager Track Record: Tenure, consistency, investment style, and adherence to the mandate.
• Portfolio Overlap: Avoid duplicating sector exposures if you already hold other sector funds.
• AUM and Liquidity: Very large funds may face scalability constraints; very small funds may wind up.

7. Implementation Strategies

• Core-Satellite Approach: Allocate 60–80% to large-cap or index funds (core) for stability, 20–40% to mid/small-cap or thematic funds (satellite) for growth. But it can change as per your risk apetite.
• Systematic Investment Plan (SIP): Invest monthly to average out market volatility.
• Systematic Transfer Plan (STP): Gradually shift from debt to equity funds to enter equity in rising markets.
• Top-Up SIPs: Increase SIP amount periodically to raise equity allocation with growing income.

8. Monitoring and Review

• Review fund performance annually against benchmark and peers.
• Rebalance portfolio if any fund’s allocation drifts >10% from target.
• Stay informed on portfolio changes, fund manager notes, and scheme ratings.

Equity mutual funds, when used with disciplined strategies and proper due diligence, can be powerful vehicles for building long-term wealth in India’s growing economy.

Regards,

Honvest Team.