About Equity Mutual Funds
Equity funds are mutual funds that invest predominantly in the equity market. According to SEBI’s guidelines on the categorisation and rationalisation of mutual fund schemes, an equity mutual fund must have at least 65% of its investments in equity stocks. The rest of the fund’s portfolio may be distributed across other asset classes like debt, money market instruments and other such assets.
Equity mutual funds may be managed actively or passively. In actively managed equity funds, a fund manager analyses the market, decides which stocks to invest in and curates the mutual fund’s portfolio based on its objectives. On the other hand, passive equity funds typically mirror an index like the Nifty 50, Sensex, or any other such benchmark.
Since equity mutual funds invest predominantly in the stock market, they are exposed to high levels of market-linked risks. The potential for generating higher returns over the long term is also correspondingly higher. The returns from equity funds are predominantly realised through capital appreciation, which occurs if the value of the stocks in the portfolio increases over the investment tenure. Additionally, some types of equity funds may also offer returns in the form of dividend payouts.
How Do Equity Funds Work?
Equity funds are created and managed by financial institutions like mutual fund companies or asset management firms. The operation of equity mutual funds begins with the launch of a New Fund Offer (NFO). During the NFO, investors can purchase units of the fund at the initial Net Asset Value (NAV). The NAV is calculated by dividing the total value of the fund's assets by the number of outstanding units. For example, if an equity mutual fund has ₹10 lakh in assets and 1 lakh outstanding units, the NAV is ₹10 per unit (₹10,00,000 ÷ 1,00,000 units).
Investors' capital is pooled together and used to invest in a diversified portfolio of stocks. Professional portfolio managers are responsible for making investment decisions on behalf of the fund's investors. They aim to achieve the fund's investment objectives, which may include capital appreciation, income generation and the like.
The NAV of an equity fund fluctuates based on the performance of the underlying stocks in the portfolio. When the stocks in the portfolio increase in value, the NAV per unit rises. Conversely, it falls when the stocks decrease in value.
Investors have the flexibility to buy or sell units of an equity fund at any time at the current NAV. This liquidity allows investors to enter or exit their investments as needed. When investors want to sell their holdings, they receive the redemption proceeds based on the current NAV.
For instance, if an investor purchased 1,000 units of an equity fund at an NAV of ₹10 per unit, their initial investment would be ₹10,000 (1,000 units x ₹10). If, at a later date, they decide to redeem those units, and the NAV has increased to ₹12 per unit, they would receive ₹12,000 (1,000 units x ₹12) as redemption proceeds. Conversely, if the NAV had decreased to ₹9 per unit, they would receive ₹9,000 (1,000 units x ₹9) upon redemption.
Features of Equity Mutual Funds
Diversification
One of the primary features of the best equity mutual funds is the diversification they offer. By investing in a wide range of stocks across different sectors and/or market caps, these funds reduce the risk associated with individual stocks.
Professional Fund Management
Equity mutual funds are managed by professional fund managers who make investment decisions based on thorough research and analysis. This expertise is particularly beneficial for investors who may not have the time or expertise to manage their own stock portfolios.
Potential for Higher Returns
While they come with higher risks, the best-performing equity mutual funds generally offer the potential for higher returns compared to fixed-income investments. This is particularly true for equity fund investments held over the long term.
Liquidity
Most equity mutual funds are open-ended, meaning that they offer high liquidity because investors can buy or sell their fund units on any business day. This feature provides flexibility and ease of access to the funds invested.
Systematic Investment Plans (SIPs)
Nearly all equity mutual funds allow investors to invest regularly through a Systematic Investment Plan (SIP). This method encourages disciplined investing and can lead to cost-averaging benefits over time.
Expense Ratio
Another key feature of all equity funds, the expense ratio is a measure of what it costs to operate a mutual fund. It is expressed as a percentage of the fund's average assets under management and includes management fees, administrative fees and other operational expenses.
Regulatory Oversight by SEBI
In India, equity mutual funds are regulated by the Securities and Exchange Board of India (SEBI). SEBI's oversight ensures the transparency, fairness and ethical management of these funds. It sets guidelines for fund management, mandates regular disclosure of fund performance and holdings, and protects investor interests.
Advantages of Investing in Equity Funds
Tax Benefits
Equity mutual funds like ELSS offer tax benefits along with the potential for wealth creation. The amount invested in these funds is deductible from the total taxable income up to Rs. 1.5 lakhs in the year of investment. Additionally, the lock-in period for these funds is only 3 years, which is the lowest among other tax-saving investments in the country.
Accessibility to Smaller Investors
Equity mutual funds democratise access to the stock market and make it possible for small investors to invest in a diversified portfolio of stocks. This may otherwise be financially challenging for individual investors, especially those with limited capital.
Ease of Portfolio Rebalancing
With equity funds, rebalancing the investment portfolio becomes simpler. Investors can switch between funds or adjust their holdings within a fund to align with their changing investment goals and risk tolerance.
Automatic Reinvestment
Many equity mutual funds offer an automatic dividend reinvestment plan. This allows investors to automatically reinvest their dividends in additional units of the fund, resulting in compounded growth over time.
Suitability for Various Financial Goals
Equity mutual fund schemes are versatile and can be aligned with various financial goals — whether they are short-term gains, long-term wealth creation or retirement planning. This makes them suitable for a wide range of investors with different investment horizons and objectives.
Risk Mitigation Through SIPs
Systematic Investment Plans (SIPs) not only encourage disciplined investing in the best equity mutual funds but also mitigate risks through rupee cost averaging. By investing a fixed amount regularly, investors can purchase more units when prices are low and fewer when prices are high, potentially reducing the average cost per unit over time.
Risk Involved in Equity Funds
Market Risk
This is the risk that the entire stock market may perform poorly and lead to declining stock prices. Since equity funds invest 65% or more of their assets in stocks, their value is directly affected by stock market fluctuations.
Volatility Risk
Volatility risk is the risk that the fund's value may fluctuate widely in the short term due to various factors like economic changes, market sentiments, political events and global issues.
Liquidity Risk
Equity funds are generally liquid. However, some funds, especially those investing in small-cap or less frequently traded stocks, may face liquidity issues. This can make it difficult to sell assets at a favourable price when needed.
Company-Specific Risk
Equity mutual funds are also exposed to risks specific to the companies they invest in. These risks include poor management decisions, financial distress or industry downturns.
Sector-Specific Risk
Sectoral equity funds face additional risks if the particular sector they focus on underperforms due to regulatory changes, technological advancements or shifts in consumer preferences.
Interest Rate Risk
Changes in interest rates can also affect equity markets. Typically, rising interest rates can lead to a decrease in stock prices, thereby affecting the performance of equity funds.
Managerial Risk
The performance of actively managed equity funds depends heavily on the fund manager's skill and investment strategy. Poor decision-making can lead to underperformance when compared to the market or the fund's benchmark.
Factors To Consider Before Investing in Equity Mutual Funds
Investment Objective
Investors must understand the objectives of equity funds and assess how they align with their individual financial goals — like long-term wealth creation or saving for a specific goal.
Risk Tolerance
Equity funds exhibit varying degrees of risk, exposure to market volatility and potential for capital loss. It’s important to choose a fund that matches the investor’s ability to tolerate risk.
Fund Performance
Although it’s not a guarantee of future results, analysing past performance over different market cycles provides valuable insights into an equity fund's potential.
Fund Manager’s Track Record
The track record and experience of the fund manager can significantly influence the fund’s performance, especially during market downturns.
Expense Ratio
The effect of the fund’s fees on its overall returns is an important factor to consider. Higher fees can eat into the overall returns over time.
Asset Allocation
The fund's approach to investing across various stocks and sectors should align with the investor’s desired exposure to different stocks, sectors, and market capitalizations.
Investment Horizon
Equity funds typically require a longer period to realise their potential gains, making them more suitable for long-term financial planning.
Exit Load
Exit load is the fee levied by some mutual fund houses when investors exit a particular scheme. These charges for early withdrawal from the fund can affect liquidity and financial planning.
Tax Implications
It’s also crucial for investors to understand the tax benefits and liabilities of purchasing and redeeming units in equity mutual fund schemes.
Who Should Invest in Equity Mutual Funds?
Investors Seeking Long-Term Growth
Equity mutual funds are particularly suitable for those aiming to build wealth over the long term. The potential for higher returns makes these funds ideal for investors who can commit their capital for extended periods, so they can benefit from market growth and compounding returns.
Investors Who Require Professional Management
Individuals who lack the expertise or time to actively manage a stock portfolio may find equity mutual funds beneficial because they are professionally managed by experts. This ensures informed decision-making and reduces the burden on individual investors.
Investors Looking for Portfolio Diversification
Investors who intend to diversify their investment portfolios can consider equity mutual funds, which offer exposure to a broad range of stocks and sectors. This diversification helps mitigate the risks associated with investing in individual stocks.
Investors With a High Tolerance for Risk
Equity mutual funds are more suited for investors with a higher tolerance for risk. The inherent market volatility of equities means that these funds can experience significant fluctuations in value, so a higher risk tolerance is crucial.
Early and Mid-Career Individuals
People in the early or middle stages of their careers often find equity funds more appealing. With a longer investment horizon, they are better positioned to withstand short-term market volatility and can gradually build their wealth.
Taxability of Equity Funds
Taxability of Dividends from Equity Funds
Dividends from equity mutual funds are added to the investor’s total income and taxed at the income tax slab rate applicable.
Taxability of Capital Gains from Equity Funds
If the mutual fund units are redeemed within 1 year from the date of investment, the profits, if any, are considered as short-term capital gains (STCG) and taxed at a flat rate of 15%. If the units are redeemed after 1 year from the investment date, the profits, if any, are considered as long-term capital gains (LTCG). Such gains in excess of ₹1 lakh are taxed at a flat rate of 10%.
Tax Benefits of Equity Linked Savings Schemes (ELSS)
ELSS mutual funds offer tax benefits under section 80C of the Income Tax Act. Investments in such funds up to ₹1.5 lakh during a financial year are deductible from the total income during the relevant assessment year.
How To Invest in Equity Funds?
Investing in the Equity Mutual Fund is hassle-free when done through your Angel One account. You just have to follow these simple steps:
Step 1: Log in to your Angel One account.
Note: In case you do not have an account with Angel One, you can open a demat account with us in under a few minutes by submitting the necessary documents.
Step 2: Determine an Equity fund that suits your needs and risk profile. You can learn more about each equity fund on the Angel One app. Things to consider at this stage are:
- Search for the fund you want to invest in.
- Analyse the fund’s past performance, tax incidence, and the sectors and companies it invests in. You can also calculate the potential returns using the calculator.
- Evaluate the fund’s level of risk, its ratings and expense ratio.
- Decide whether you want to invest via SIP or make a one-time investment
- Decide your monthly SIP date. Now, enter the amount you want to invest and choose the payment mode.
- After placing the order, you can create an AutoPay to make hassle-free future instalments in case of SIP investments.
Top 5 Equity Mutual Funds
The following are the top Equity Funds in India:
| Name of the Fund | AUM (₹ Cr) | CAGR 5Y | Expense Ratio | Alpha | Sharpe Ratio | CAGR 3Y |
| Quant Small Cap Fund | 26670.21 | 42.89 | 0.65 | -0.21 | 0.22 | 23.70 |
| Quant Infrastructure Fund | 3535.985 | 33.70 | 0.68 | 1.23 | 0.37 | 22.78 |
| Bank of India Small Cap Fund | 1658.257 | 33.04 | 0.45 | 2.83 | 0.61 | 20.14 |
| Nippon India Small Cap Fund | 61973.76 | 31.78 | 0.68 | 2.52 | 0.60 | 24.38 |
| Quant Mid Cap Fund | 8891.197 | 31.43 | 0.59 | -0.71 | 0.36 | 24.61 |
Quant Small Cap Fund
The Quant Small Cap Fund ranks 1st with a 5-year CAGR of 42.89%. It has an AUM of ₹26,670.21 crore and an expense ratio of 0.65%, which is tied for 2nd highest among the 5 funds.The fund’s alpha is -0.21, reflecting marginal underperformance compared to its benchmark, while its Sharpe ratio of 0.22 is the lowest in the list. Over the past 3 years, the fund has delivered a CAGR of 23.70%, ranking 3rd among the funds in 3-year performance.
Quant Infrastructure Fund
The Quant Infrastructure Fund ranks 2nd based on its 5-year CAGR of 33.70%. It has an AUM of ₹3,535.99 crore, which is the 2nd lowest among the funds, and an expense ratio of 0.68%, tied for the highest in the list.The fund’s alpha of 1.23 reflects moderate outperformance, and its Sharpe ratio of 0.37 ranks 3rd. Over the past 3 years, the fund has delivered a CAGR of 22.78%, placing it 5th in the 3-year performance rankings.
Bank of India Small Cap Fund
The Bank of India Small Cap Fund ranks 3rd with a 5-year CAGR of 33.04%. It has an AUM of ₹1,658.26 crore, the lowest among the 5 funds, and an expense ratio of 0.45%, which is the lowest in the list.The fund’s alpha of 2.83 is the highest among the funds, while its Sharpe ratio of 0.61 is also the highest, reflecting favourable risk-adjusted returns. Its 3-year CAGR of 20.14% ranks 4th in this group.
Nippon India Small Cap Fund
The Nippon India Small Cap Fund ranks 4th based on its 5-year CAGR of 31.78%. It has the highest AUM among the funds, at ₹61,973.76 crore, and an expense ratio of 0.68%, tied for the highest in the list.The fund’s alpha of 2.52 is the 2nd highest, and its Sharpe ratio of 0.60 is also the 2nd highest. Over the past 3 years, the fund has delivered a CAGR of 24.38%, ranking 2nd among the funds in 3-year performance.
Quant Mid Cap Fund
The Quant Mid Cap Fund ranks 5th with a 5-year CAGR of 31.43%. It has an AUM of ₹8,891.20 crore and an expense ratio of 0.59%, which is the 3rd lowest among the funds.The fund’s alpha is -0.71, the lowest in the list, while its Sharpe ratio of 0.36 ranks 4th. Over the past 3 years, the fund has delivered a CAGR of 24.61%, which is the highest among the funds.
