What is Equity Fund? - Types of Equity Funds and Taxation

Published On: 14-Jul-2020

Equity Funds are a specific category of mutual fund schemes that invest predominantly 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 equip the investors with the potential of long-term wealth creation, such funds are considered to be an preferred investment to achieve long-term financial goals. 

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The different types of equity funds are as discussed below:

Multi-Cap Fund:

Such equity funds may invest across different segments of market capitalisation, viz. large-cap, mid-cap, and small-cap. 

Large Cap Fund:

Such funds must invest at least 80% of their net assets in equity shares and related instruments of large-cap companies, comprising of the top 100 companies in terms of full market capitalisation. 

Mid Cap Fund:

Such funds invest at least 65% of its net assets in equity shares and related instruments of mid-cap companies, comprising of companies at rank 101 to 250 in terms of full market capitalisation. 

Large & Mid-Cap Fund:

At least 35% must be invested each in large-cap stocks and mid-cap stocks by such funds. 

Small Cap Fund:

A small-cap fund should invest at least 65% of its net assets in equities and equity-related instruments of small-cap companies, comprising of the companies not classified under the large-cap or mid-cap category. 

Dividend Yield Fund:

These funds invest predominantly in stocks with high dividend yields with at least 65% of their portfolio in equity-related instruments.

Value Fund/ Contra Fund:

A value fund aims for value investment strategy, wherein the potential investment opportunities with deep value are the investment candidates. A contra fund follows a contrarian investment strategy, wherein the investment candidates are the companies expected to behave in the opposite direction than the prevailing sentiments. 

 Focused Fund:

 Such funds invest in a concentrated portfolio of stocks, with a maximum number capped at 30, with a minimum 65% investment in equity-related instruments. 

Sectoral/ Thematic Fund:

Such funds must invest at least 80% of its net assets in equity related instruments of such sector/ theme, and thus, provide focused investment exposure to specific sectors.

Equity Linked Savings Scheme (ELSS):

Such funds need to invest at least 80% of its net assets in equity-related instruments per Equity Linked Savings Scheme, 2005 notified by the Ministry of Finance. 

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:

  1. Visit the website of the mutual fund house.

  2. Click on ‘buy now/ invest’ option, which will redirect the investor to the transaction interface.

  3. 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.

  4. 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. 

  5. The mutual fund will process the purchase transaction, and the account statement will be shared over e-mail within 1-2 working days.    

Taxation for Equity Mutual Fund Schemes 

As per the current tax laws, the gains from equity funds can be classified into Short-Term Capital Gains (STCG) and Long -Term Capital Gains (LTCG) depending upon whether the holding period of units is less than 12 months or not. STCG from equity funds is taxable @ 15% (plus applicable cess and surcharge), while LTCG is taxed at 10% (plus applicable cess and surcharge) without any benefit of indexation. Further, one may also claim exemption of Rs. 1 lakh in respect of LTCG on equity shares and equity funds taken together during a financial year. 

Amongst the diverse universe of equity funds, one may choose the equity fund which best suits his/ her financial goals and investing strategy. 

Note: The tax provisions, as mentioned in the article, are for illustrative purposes only, and are updated as per the Union Budget 2020 passed by the Parliament. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale and not on the date of investment.