Equity Oriented Mutual Fund Schemes Explained

Published On: 07-May-2019

Mutual fund schemes may broadly be classified into three categories on the basis of asset classes:

  1. Equity Schemes Funds which invest predominantly in equity securities

  2. Debt Schemes Funds which invest predominantly in debt securities

  3. 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, Income Tax Act, 1961 classifies the mutual funds into only two categories – equity oriented mutual fund and non-equity oriented mutual fund. However, before we discuss the tax treatment, it is first important to discuss what equity oriented mutual fund scheme is.

Features and Types of Equity-Oriented Mutual Funds

 

What is equity oriented mutual fund scheme?

Equity-oriented mutual funds schemes are such funds which invest at least 65% of the assets in equities and equity related instruments. As such, the portfolio of equity oriented funds will be skewed in favor of equity investments.

As per the classification guidelines by the Securities and Exchange Board of India (SEBI), equity-oriented mutual funds schemes may be classified into 11 types:

  1. Multi-Cap Fund – Such funds enjoy the flexibility to invest across the market capitalizations with minimum 65% in domestic equities. As such, it may invest across the 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 Rs. 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 latest 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 Rs. 8,589 crores to Rs. 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 251st onwards 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 listed companies below the average market cap of Rs. 8,519 crores are all small-cap companies.

  6. Dividend Yield Fund – Such funds predominantly invest 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.

  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 and thus, need to invest a minimum of 80% of their portfolio in equity related instruments of a particular sector/ theme they are focusing on.

  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.

Tax Treatment for Equity Oriented Mutual Fund Schemes

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 Rs. 1 lakh a year.

Disclaimers: 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 2017. 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 TrusteeCompany 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 orinaccuracy 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.