Types of Equity Funds to Invest
Equity funds are those funds, which invest predominantly in equity and equity-related securities. Such investment exposures can include investments in equity shares of companies, or related derivatives with underlying equity shares. Investors can choose from a wide range of equity funds and benefit from the long-term wealth creation potential of the equity markets.
Mutual funds offer the following ten types of equity mutual funds to invest:
Multi-Cap Fund – A multi-cap fund invests the funds across the market capitalisation segments, i.e. large-cap, mid-cap, and small-cap, with a minimum equity investment of 65%.
Large Cap Fund – A large-cap fund invests at least 80% of the net assets in equity and related instruments of large-cap companies. Securities and Exchange Board of India (SEBI) defines Large Cap companies as top 100 companies in terms of full market capitalisation. Further, if the stocks are listed on more than one exchange, market capitalisation can be calculated as an average of market cap across all such stock exchanges.
Mid Cap Fund – A mid-cap fund invests at least 65% of its net assets in equity and related instruments of mid-cap companies. Mid Cap Companies are defined as the companies at Rank 101st to 250th in terms of full market capitalisation.
Large & Mid Cap Fund – Such funds must invest at least 35% of their net assets each from the stocks in large cap space and mid cap space respectively. As such, the investors can be assured of having at least 70% portfolio of the mutual fund scheme in the top 250 companies in terms of full market capitalisation (minimum 35% in 1-100 companies and further minimum 35% in 101-250 companies).
Small Cap Fund – A small-cap fund must invest at least 65% of its net assets in equities & equity-related instruments of small-cap companies. Small-Cap companies are the residual category in the market capitalisation segment, featuring beyond Rank 250 in terms of full market capitalisation. In simpler words, any company that cannot be categorised as large-cap or mid-cap will be classified as small-cap.
Dividend Yield Fund – Such funds aim to invest predominantly in dividend-yielding stocks, i.e. in companies having better dividend pay-out. Dividend yield denotes the annual dividend per share declared by the Company as compared to the prevailing market price of the equity shares.
Value Fund/ Contra Fund – Being equity funds, while the value fund and contra fund must invest at least 65% of their net assets in equity & equity related instruments, they are different in terms of investment strategies adopted. A value fund tends to adopt a value investment strategy, wherein the fund manager aims to spot potential investment opportunities with deep value embedded within them, as compared to current prevailing valuations. On the other hand, a contra fund tends to follow a contrarian investment strategy, wherein the fund manager tends to spot investment opportunities and make investment decisions against the prevailing market sentiments. A mutual fund house can either offer a value fund or a contra fund to the investors.
Focused Fund – Such funds aim at building a focused portfolio, with not more than 30 stocks in the portfolio at any point in time. Further, in terms of SEBI rules for such schemes, the scheme must disclose the market capitalization segment wherein the scheme would focus, i.e. multi-cap, large-cap, mid-cap, or small-cap.
Sectoral/ Thematic Fund – The investors aiming to benefit from specific investment opportunities in a particular sector/particular theme can consider investing in sectoral/ thematic funds, as such funds invest at least 80% of their net assets in equity 7 & equity related instruments of specific sectors/ themes.
Equity Linked Savings Scheme (ELSS) – Such funds invest at least 80% of their portfolio in equity & equity-related instruments, as per the Equity Linked Savings Scheme, 2005 notified by the Ministry of Finance. Such funds carry a lock-in period of 3 years from the investment date and the investors in such funds can claim tax benefit under Section 80C of the Income Tax Act, 1961 up to a maximum of Rs. 1.50 lakhs.
Tax Treatment for Equity Funds
Now that you know about different types of equity mutual funds to invest in, it is equally essential for you to know about the tax incidence of investing in such funds. As per the provisions of Income Tax laws, the gains from equity-oriented mutual funds must be classified as Short-Term Capital Gains (STCG) if the holding period of such investments is less than 12 months. However, if the investment is held for 12 months or more, any gains from such investments can be classified as Long-Term Capital Gains (LTCG).
The investors need to pay tax @ 15% (plus applicable cess and surcharge) in respect of STCG from equity funds, whereas LTCG is taxed at 10% (plus applicable cess and surcharge) without any indexation benefit. Further, an aggregate amount of Rs. 1 lakh can be claimed as tax-free in terms of LTCG from all the equity-related transactions during a financial year.
With a wide range of equity mutual funds available for investment, the investors must make an informed decision to select a mutual fund scheme best suiting their risk profile, financial goals, and future financial needs.
* The income tax provisions and benefits have been updated as per Finance (No. 2) Act, 2019. However, the tax treatment will be required to be made as per the tax laws applicable on the redemption date. Please consult your tax advisor for more details.
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.
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