Equity Mutual Funds: Long Term Wealth Growth

Equity Mutual Funds invest principally in stocks. These are also known as stock funds. Equity Funds invest in the shares of different companies. These funds principally categorize according to company size, the investment style of the holdings in the portfolio & geography.

learn about why you should invest in equity mutual funds

Equity mutual funds are the riskiest class of mutual funds. Hence, they have the potential to provide higher returns than debt & hybrid funds. The performance of the companies invested in, plays a significant role in deciding the investors’ returns.

(A) Types of Equity Mutual Funds

Equity funds categorize on the basis of investment mandate as well as the kind of stocks and sectors they invest in.

equity mutual funds diversification

(i) Equity Mutual Funds on the basis of Market Capitalization

Large-Cap Funds

Large cap mutual funds are equity funds which typically invest a minimum of 80% of their total assets primarily in the top 100 (as per Market Cap) companies. These companies are some of the biggest brands in our country. Also, most Indians use their products daily. These schemes are considered to be more stable than the mid-cap or small-cap focused funds.

Mid-Cap Funds

Mid Cap Mutual Funds are equity funds which usually invest around 65% of their total assets in equity shares of mid-cap companies (101-250th placed companies according to market capitalization). The companies are some of the fastest-growing companies in India. Also, many of these companies are at a stage, today’s leaders were a few years back. These schemes tend to offer better returns than the large-cap schemes but are also more volatile than them.

Small-Cap Funds

Small Cap equity funds which typically invest around 65% of their total assets in the smallest companies in India. These companies are beyond the top 250 companies and are mostly unheard in our daily lives. While they can deliver fantastic returns, small cap companies are incredibly volatile, and you can see losses in short to medium term.

Large and Mid-Cap Funds

Large and Mid-Cap Mutual Funds are equity funds which usually invest around 35% of their total assets in India’s top 200 companies. These funds bring together India’s biggest companies, as well as mid-sized companies that are challenging those big companies for the top slot. These schemes offer a great blend of lower volatility and better returns.

Multi-Cap Funds

Multi-Cap Funds are those equity funds which usually invest around 65% of their total assets in equity shares of large-cap, mid-cap and small-cap companies in varying proportions. In these schemes, the fund manager keeps re-balancing the portfolio to match the market and economic conditions as well as the investment objective of the scheme.

(ii) Based on Investment Strategy

Theme and Sector Funds

Equity funds that focus investments on a particular sector or theme fall under this category. Sector funds invest in a specific industry such as FMCG, pharma, or technology. Thematic funds follow one specific subject, such as emerging consumer companies or international stocks. It is important to note that sector or theme-based funds carry a higher risk since they focus on a specific sector or theme.

The minimum investment in equity & equity related instruments of a particular sector/ theme shall be 80% of total assets.

Focused Equity Fund

This fund invests in a maximum of 30 stocks of companies having market capitalisation as specified at the time of the launch of the scheme.

Contra Equity Fund

These schemes follow a contrarian strategy of investing. These schemes analyse the market to find under-performing stocks and purchase them at low prices under the assumption that these stocks will recover in the long term.

(iii) Based on Investment Style

Active Funds

Fund managers actively manage these schemes. Thus, the managers handpick the stocks that they want to invest in.

Passive Funds

These schemes usually track a market index or segment which determines the list of stocks that the scheme will invest in. In these schemes, the fund manager has no active role in the selection of the stocks.

(iv) Based on Tax Treatment

Equity Linked Savings Scheme (ELSS)

ELSS Funds is the only equity scheme which offers tax benefits of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. These schemes invest a minimum of 80% of its total assets in equity and equity related instruments. Further, these schemes have a lock-in period of 3 years.

Non-Tax Saving Equity Mutual Funds

Except ELSS, all other Equity Funds are non-tax saving schemes.

For all funds, long term capital gain (LTCG) Tax on redemption is exempted up to Rs. 1 lakh. If LTCG is more than 1 lakh, the applicable tax is 10% without indexation. Tax on short term capital gains (STCG) is 15%.

(B) Wealth growth with Equity Mutual Funds

For Long term investors, Equity Mutual Funds generate good wealth which easily beats inflation rate. So if you want to stay invested for a period of five years or more Equity Funds are best options for you. But, performance of these funds also affected by markets in the short term. Therefore, one should invest only those funds in equity mutual funds which are meant to be invested for long term, minimum 5 years.

For Example If you invest Rs.1,00,000 in Equity funds for the period of 15 years than at the end of 15 years, your amount shall be Rs. 9,35,762 with the CAGR of 15% p.a. This is an average rate of return for equity mutual funds in long term.

Thus, investment in equity funds is for long term only for higher wealth growth.

equity mutual funds performance in long term results in great wealth creation

(C) Performance of Some Equity Mutual Funds

(i) Parag Parikh Long Term Equity Fund (Equity Multi cap)

Trailing Returns of the fund as compared to category average

PPFAS equity mutual funds performance comparison

(ii) Canara Robeco Equity Diversified Fund (Equity Multi cap)

Trailing Returns of the fund as compared to category average

Canara robeco equity mutual funds performance for long term wealth growth

(iii) Canara Robeco Emerging Equities Fund (Equity Large & Mid cap)

Trailing Returns of the fund as compared to category average

Canara robeco emerging equity mutual funds performance for long term wealth growth

Note: These returns are as on 7 November 2020. The future returns shall vary as per the market performance.

(D) Features of Equity Mutual Funds

(i) Lower Expense Ratio

The frequent buying and selling of equity shares often impact the expense ratio of equity funds. The Securities and Exchange Board of India (SEBI) has capped the expense ratio at 2.5% for equity funds. A lower expense ratio will translate into higher returns for investors as they won’t bear more expenses.

(ii) Portfolio Diversification

Equity Funds allow you to gain exposure to several good equity shares by investing a small amount in the shares of different companies operating in different sectors. Hence, your equity portfolio is diversified and offers a better opportunity of earning good returns.

(iii) Tax Exemption under Section 80C

The Equity Linked Savings Scheme or ELSS offers tax exemption under Section 80C of the Income Tax Act with exposure to equity. It has a small lock-in period of 3 years & offers great potential for earning high returns. You can also invest in an ELSS in installments.

(iv) Managed By Experts

These Funds are managed by various experts who have immense knowledge. Therefore, the investor need not to worry about the markets as there fund manager are doing this work on behalf of them as their main objective is to generate good returns for their investors.

Research analysts of PA Wealth Advisors significantly consider the qualification & background of the fund managers before choosing the right mutual funds for the investors.

(v) Convenient

Equity Funds are most convenient options for the the investors who want to own shares of the company but are not ready to face market ups & downs. As in Equity funds more than 60% of the amount is invested in shares of the companies rather than debt. Thus, investors need to worry less in equity funds rather than investing in direct equity shares.

Right equity funds added in overall mutual funds portfolio accelerate the wealth growth in long term.

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References:  Industry’s Publications & Websites of AMCs . 

Disclaimer: The report only represents personal opinions and views of the author. No part of the report should be considered as recommendation for buying/selling any stock/fund. Thus, the report & references mentioned are only for the information of the readers about the industry stated.

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