What are Equity Mutual Funds

Are you looking for a cost-effective, convenient and flexible option to invest your money? Here’s where equity mutual funds come in as a great option for you! But, before investing your hard-earned money, it’s best to know what equity mutual funds are.

An equity mutual fund is a type of investment instrument that primarily invests in stocks of companies in various proportions. It can be categorised according to the size of the companies, geography, industries or investment style. Equity investments can be in large-cap, small-cap or a combination of the two. The investment style could be value-oriented or growth-oriented.

The answer to the question what are equity mutual funds is incomplete without including equity linked saving schemes (ELSS). These are close-ended funds with a lock-in period of around three years. They include diversified equity schemes and have gained immense popularity in India.

Before investing in equity mutual funds, it’s best to determine your:

• Financial goals – Such as retirement planning, child’s education, foreign trip, etc.
• Spending strategy – How much income you earn and what are your critical expenses.
• Risk appetite –To determine your risk tolerance, you will need to evaluate your spending and saving patterns and determine how much can you invest in more risky assets.

Investments carry a risk-reward trade-ff. This means that investments with low risk typically offer low returns. Equity funds involve higher risk than debt funds, but also have the potential to offer significantly higher returns. For better risk management, you will need to diversify your investment portfolio. The most effective way to do this is by investing in mutual funds.

Equity mutual funds represent ownership or share of the insurer in various companies. They offer numerous benefits that other investment instruments don’t offer, such as professional money management, low cost, diversified portfolio, convenience, capital appreciation and dividend. Moreover, mutual funds offer higher flexibility and liquidity. Also, these are a type of systematic investment that involves no commission or brokerage.

When you ask what are equity mutual funds, you should also ask about how the earnings are taxed. When you redeem your equity mutual fund, capital gain tax may apply, depending on the period for which you have remained invested in the fund. This period for which you stay invested is known as the holding period. If your holding period is one year, the capital gains earned are called short-term capital gains (STCG) and are subject to a 15% tax rate. On the other hand, capital gains earned on holding periods of more than a year is called long-term capital gains (LTCG) and are subject to only 10% tax, provided they exceed Rs.1 lakh.