Mutual Funds Classification
Types of mutual fund schemes based on asset classes:
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Equity Schemes–Funds which invest predominantly in equity securities
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Debt Schemes–Funds which invest predominantly in debt securities
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Hybrid Schemes–Funds which enjoy the flexibility to allocate their portfolio between equity/ debt as per the scheme objective
Further, for the purpose of taxation, the Income Tax Act, 1961 classifies mutual funds into only two categories – equity-oriented mutual funds and non-equity-oriented mutual funds.
What Is An Equity Fund?
Equity Mutual Funds are a specific category of mutual fund schemes that invest at least 65% of the assets or the portfolio size in equity and equity-related securities. The investment exposure can be in the form of direct investments in equity shares of domestic companies or through related derivatives with underlying equity exposure. Since equities offer investors the potential for long-term wealth creation, such funds are considered to be a preferred investment for achieving long-term financial goals.They are also known as growth mutual funds.
As per the classification guidelines by the Securities and Exchange Board of India (SEBI), equity-oriented mutual fund schemes may be classified into 11 types:
Types of Equity Mutual Funds
1. Multi-Cap Fund
Such funds enjoy the flexibility to invest across market capitalizations, with a minimum of 65% in domestic equities. As such, they may invest in large-cap, mid-cap, and small-cap stocks.
2. Large Cap Fund
Such funds need to invest a minimum of 80% of their portfolio in equity related instruments of large-cap companies. Large Cap companies are defined as the top 100 companies in terms of full market capitalization, calculated as an average of market cap across all stock exchanges where such stocks are listed. As per the latest list issued by the Association of Mutual Funds of India for the half year ended 31st December 2018, the cut-off for large-cap companies is at the average market cap of ₹28,332 crores.
3. Mid Cap Fund
Such funds need to invest a minimum of 65% of their portfolio in equity related instruments of mid-cap companies. Mid Cap Companies are defined as the companies featuring at Rank 101st to 250th in terms of full market capitalization, calculated as an average of market cap across all stock exchanges where such stocks are listed. As per the list issued by the Association of Mutual Funds of India for the half year ended 31st December 2018, the average of market cap for mid-cap companies ranges from ₹8,589 crores to ₹27,944 crores.
4. Large & Mid Cap Fund
Such funds need to invest at least 35% in equity related instruments of large-cap stocks and further, at least 35% in equity related instruments of mid-cap stocks.
5. Small Cap Fund
Such funds need to invest a minimum of 65% of their portfolio in equity-related instruments of small cap companies. Small Cap companies are defined as the companies featuring at Rank 251 st onwards in terms of full market capitalization, calculated as an average of market cap across all stock exchanges where such stocks are listed.
6. Dividend Yield Fund
Such funds predominantly go for equity investing in dividend yielding stocks with a minimum of 65% of their portfolio in equity related instruments.
7. Value Fund
Such funds follow a value investment strategy with a minimum of 65% of their portfolio in equity related instruments.
Read More - What are Value Funds?
8. Contra Fund
Such funds follow a contrarian investment strategy with a minimum of 65% of their portfolio in equity related instruments.
9. Focused Fund
Such funds are focused on the number of stocks in a portfolio and thus carry a maximum of 30 stocks in the portfolio. Further, such schemes must clearly outline where the scheme intends to focus i.e., multi-cap, large cap, mid cap, and small cap and further invest a minimum of 65% of their portfolio in equity related instruments.
10. Sectoral/ Thematic Fund
Such funds aim at capturing investment opportunities in a particular sector/ theme. Sectoral funds make investments in a particular industry or area of the economy, such as pharmaceuticals, fast-moving consumer goods, technology, or infrastructure. Thematic funds, on the other hand, invest in industries based on a specific investment theme, such as equity investing solely in foreign equities or in up-and-coming consumer enterprises. These funds are required by SEBI (Securities and Exchange Board of India) regulations to invest at least 80% of their capital in equities related to a certain subject. The success of each of these areas or investment topics affects the performance of the corresponding funds.
11. Equity Linked Savings Scheme
Such funds need to invest at least 80% of their portfolio in equity related instruments. Further, such funds carry a lock-in period of 3 years from the date of investment and are eligible for tax deduction u/s 80C of the Income Tax Act, 1961.
How to Invest In Equity Mutual Fund Scheme?
The procedure to invest in equity mutual fund scheme is convenient and similar to what an investor needs to follow in other mutual fund categories. As such, one may follow the following steps to invest in equity funds:
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Visit the website of the mutual fund house.
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Click on ‘buy now/ invest’ option, which will redirect the investor to the transaction interface.
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The portal will then validate the PAN and KYC compliance status of the investor. Once the same has been verified, one must provide the details of the investment, including the scheme name, mode of investment, i.e., lumpsum or SIP, bank account details for redemption, nominee details, etc.
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The transaction interface will then redirect the investor to the payment gateway for making payment for the investment transaction. Once the investor makes the payment, the acknowledgement is generated for the successful investment transaction.
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The mutual fund will process the purchase transaction, and the account statement will be shared over e-mail within 1-2 working days.
Read More - 5 Principles of Equity Investing
Tax Treatment for Equity Oriented Mutual Fund Schemes
It is important to know about equity-oriented mutual fund taxation. The returns from mutual fund schemes are taxed as Capital Gains in the hands of investors. The gains from equity oriented mutual fund schemes are classified as short-term capital gains if the investment in such funds has been for a period of less than 12 months. If the investment are held for more than 12 months, the gains will be taxed as long term capital gains. Short term capital gains are taxed at 15% (plus applicable cess and surcharge), whereas long term capital gains are tax at 10%. Further, long term capital gains from equities and equity oriented mutual fund schemes are exempt up to ₹1 lakh a year.
Disclaimer:
The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. In view of the individual nature of the tax consequences, each investor is advised to consult his or her or their own tax consultant with respect to specific tax implications arising out of their participation in the Scheme. Income Tax benefits to the mutual fund & to the unit holder is in accordance with the prevailing tax laws/finance bill 2018. Any action taken by you on the basis of the information contained herein is not intended as on offer or solicitation for the purchase and sales of any schemes of UTI mutual Fund. Please read the full details provided in SID and SIA carefully before taking any decision.
UTI AMC Ltd is not an investment adviser, and is not purporting to provide you with investment, legal or tax advice. UTI AMC Ltd or UTI Mutual Fund (acting through UTI Trustee Company Pvt. Ltd) accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, mistake or inaccuracy with this document, its contents or associated services, or due to any unavailability of the document or any part thereof or any contents or associated services.