EQUITY FUNDS INDIA?

Equity fund is a class of mutual fund that primarily invests in listed stock market
securities. Thanks to the stellar long-term returns, equity funds have become one of the
most popular long-term investment avenues in India in recent times. As per the data
released by the Association of Mutual Funds in India (AMFI), more than Rs. 8 lakh
crores have been invested in equity mutual funds until December 2018. This article will
help you to get answers to all your questions related to equity funds in India.

What is an Equity Fund?

An equity mutual fund predominantly invests its assets in equities i.e. listed stock market
securities. As per the SEBI Mutual Fund guidelines, an equity fund is mandatorily required
to invest at least 65% of its assets in equities and equity-related instruments. It can invest
the balance 0-35% in debt or money market securities. Equity funds can be managed
actively or passively. While most equity schemes in India are actively managed, examples
of passively managed equity schemes include Exchange Traded Funds (ETFs) and Index
Funds.

How are the Equity Funds Classified?

Equity funds can be principally categorised based on the size of listed companies
(market capitalization) they invest in, the geography they focus their investments in and
the investment style. Some equity funds invest in securities of a specific sector such as
pharma, banking, automobile, IT etc. are known as sectoral funds.
Types of Equity Funds
The Securities and Exchange Board of India (SEBI) has classified equity funds as
follows:

Based on Market Capitalization

1. Large Cap Equity Fund: An open-ended equity scheme which invests at least
80% of its assets in the shares of large cap companies i.e. top 100 companies in
terms of total market capitalisation. Large cap funds help you maintain stability in
your portfolio as they are less volatile than their mid and small cap counterparts.
However, these funds typically generate relatively lower returns than small cap
and mid cap equity funds.
2. Mid-Cap Equity Fund: An open-ended equity scheme which invests at least 65%
of its total assets in mid cap stocks i.e. stocks which rank from 101st to 250th
position in terms of total market capitalisation. These funds tend to provide
relatively higher returns than large cap funds but are prone to higher volatility as
compared to large cap equity schemes. Such funds are suitable for investors with
relatively higher risk appetite.
3. Large and Mid-Cap Equity Fund: An open-ended equity scheme which invests
at least 35% of its assets in large cap and at least another 35% of its assets in mid
cap stocks. Since a large and mid-cap fund invests in both large and mid-cap
stocks, it can provide an optimal blend of higher returns and lower volatility. While
mid cap stocks can potentially provide higher returns that pure large cap mutual
funds, the presence of large cap stocks in the portfolio makes the fund less volatile
than pure mid cap mutual funds. Investors with the perspective of high return at
moderate risk can look out for a large and mid-cap equity fund.
4. Small Cap Equity Fund: It is an open-ended equity scheme which invests at least
65% of its total assets in small cap stocks i.e. stocks with 251st and below ranking
in terms of market capitalisation. Roughly 95% of all listed companies in India, fall
in this category. Small cap funds are suitable for investors who are willing to
embrace higher volatility and risk to earn higher returns.
5. Multi-Cap Equity Fund: An open-ended equity scheme which invests at least 65%
of its assets across the large cap, mid cap, and small cap stocks and other equity
related instruments. Multi cap funds can provide relatively higher returns than other
funds like large cap, mid cap, and small cap as they have the advantage of
investing across the market. In a multi-cap fund, the fund manager rebalances
between large, mid and small stocks and this is a lower-cost option than if you had
to switch between large, mid and small cap mutual funds yourself. The latter option
can involve exit load and tax, while the former does not.
Based on Profit Distribution and Growth
Prospects
1.
1. Dividend Yield Equity Fund: An open-ended equity scheme which invests
at least 65% of its total assets in equities, predominantly in dividend-yielding
stocks. It is important to note that this fund invests in stocks which are
capable of providing good dividends but the fund is not under any obligation
to declare dividends.
2. Value Equity Fund: An open-ended equity scheme which follows a value
investment strategy. These funds invest in stocks which are presently
underperforming due to being out of favour and therefore, available at a
discount. underperforming or stocks with low P/E (Price to Earnings) ratio
or stocks of companies belonging to emerging sectors which have the
potential of rap.
3. Growth Equity Fund: The primary goal of a growth equity fund is of capital
appreciation by investing the corpus in a diversified portfolio of growth-
oriented stocks. These funds either do not pay or pay very little dividends.
Companies with high growth potential and good corporate earnings which
reinvest their profits are included in growth equity funds.

Based on Investment Strategy

1. Contra Equity Fund: An open-ended equity scheme which follows a contrarian
investment strategy. This fund invests against the ongoing marketing trends and
bets its money on currently underperforming stocks. This fund assumes that these
current underperformers will recover in the long term as and when the short-term
concerns plaguing them are mitigated.
2. Focused Equity Fund: An open-ended equity scheme which invests a minimum
of 65% of its total assets in maximum 30 stocks, mentioning the market
capitalisation segments at which it intends to focus. Other equity funds typically
hold 50-100 stocks. These funds thus take higher risks their holdings, than other
types off equity funds but have the potential of giving good returns.
3. Sectoral/Thematic Equity Fund: An open-ended scheme which invests at least
80% of its total assets in a particular sector or theme such as Banking, IT or
Pharma. These funds are a risky investment option as their returns are dependent
on the performance of single sector/theme but if timed correctly, can also give
extremely high returns.

Based on Equity Fund Management Style

 Active Equity Funds: Equity funds actively managed by the fund managers are
known as active equity fund. With active equity funds, managers pick stocks to
invest fund corpus to secure higher returns than its benchmark. Since active funds
have relatively higher churning of the portfolio than passive funds, the fund
management fee is also higher.
  Passive Equity Funds: These funds track a market index or any particular market
segment to determine where to invest in. Equity funds that follow a particular index
as its investment strategy are known as index funds. Another example of a passive
fund is ETF. ETFs are not actively managed by fund managers. Instead, an ETF
may simply copy an index and endeavour to replicate its performance.

Based on Tax Treatment

1. ELSS: Equity Linked Saving Scheme (ELSS) is again an open-ended equity fund with
added tax benefits. ELSS invests at least 80% of its total assets in equities and equity
related instruments. This fund comes with a statutory lock-in period of 3 years and is
eligible for a tax deduction of up to Rs. 1.5 lakh under section 80C of the Income Tax Act,
1961.

2. Non-Tax Saving Equity Funds: All equity funds other ELSS are basically non-tax
saving equity funds. These funds are subject to Short Term Capital Gains Tax (STCG)
or Long Term Capital Gains Tax (LTCG) based on the period of holding.

1. What is a Debt Fund?

Buying a debt instrument is similar to giving a loan to the issuing entity. A debt fund
invests in fixed-interest generating securities like corporate bonds, government
securities, treasury bills, commercial paper and other money market instruments. The
basic reason behind investing in debt fund is to earn interest income and capital
appreciation. The issuer pre-decides the interest rate you will earn as well as maturity
period. That’s why they are called ‘fixed-income’ securities because you know what
you’re going to get out of them.

2. How do Debt Funds work?

Debt funds invest in different securities, based on their credit ratings. A security’s credit
rating signifies whether the issuer will default in disbursing the returns they promised.
The fund manager of a debt fund ensures that he invests in high credit quality
instruments. A higher credit rating means that the entity is more likely to pay interest
on the debt security regularly as well as pay back the principal amount upon maturity.
This is why debt fund which invest in higher-rated securities will be less volatile,
compared to low-rated securities. Additionally, the maturity also depends on the
investment strategy of the fund manager and the overall interest rate regime in the
economy. A falling interest rate regime encourages the manager to invest in long-term
securities. Conversely, a rising interest rate regime encourages him to invest in short-
term securities.

2. Who should Invest in Debt Funds?

Debt funds try to optimize returns by diversifying across different types of securities.
This allows debt funds to earn decent returns, but there is no guarantee of returns.
However, debt fund returns often falls in a predictable range. This makes them safer
avenues for conservative investors. They are also suitable for people with both short-
term and medium-term investment horizons. Short-term ranges from 3 months to 1
years, while medium term ranges from 3 years to 5 years.
a. Short-term debt funds
For a short-term investor, debt funds like liquid funds may be an ideal investment,
compared to keeping your money in a saving bank account. Liquid funds offer higher
returns in the range of 7%-9% along with similar kind of liquidity for meeting
emergency requirements.

b. Medium-term debt funds

For a medium-term investor, debt funds like dynamic bond funds can be ideal to ride
the interest rate volatility. Compared to 5-year bank FD, these bond funds offer higher
returns.

3. Types of Debt Funds

As mentioned above, there are many types of debt mutual funds, suiting diverse
investors. The primary differentiating factor between debt funds is the maturity period
of the instruments they invest in. Here are the different types of debt funds:

a. Dynamic Bond Funds

As the name suggests, these are ‘dynamic’ funds, which means that the fund manager
keeps changing portfolio composition according to changing interest rate
regime. Dynamic bond funds have a fluctuating average maturity period because these
funds take interest rate calls and invest in instruments of longer as well as shorter
maturities.

b. Income Funds
Income Funds can also take a call on interest rates and invest in debt securities with
different maturities, but most often, income funds invest in securities that have long
maturities. This makes them more stable than dynamic bond funds. The average
maturity of income funds is around 5-6 years.

c. Short-Term and Ultra Short-Term Debt Funds

These are debt funds that invest in instruments with shorter maturities, ranging from 1
to 3 years. Short-term funds are ideal for conservative investors as these funds are
not largely affected by interest rate movements.

d. Liquid Funds
Liquid funds invest in debt instruments with a maturity of not more than 91 days. This
makes them almost risk-free. Rarely have liquid funds seen negative returns. These
funds are better alternatives to savings bank accounts as they provide similar
liquidity with higher returns. Many mutual fund companies offer instant redemption on
liquid fund investments through special debt cards.

e. Gilt Funds
Gilt Funds invest in only government securities – high-rated securities with a very low
credit risk. It’s because the government seldom defaults on the loan it takes in the form
of debt instruments. This makes gilt funds ideal for risk-averse fixed income investors.

f. Credit Opportunities Funds

These are relatively newer debt funds. Unlike other debt funds, credit opportunities
funds don’t invest according to the maturities of debt instruments. These funds try to
earn higher returns by taking a call on credit risks or by holding lower-rated bonds that
come with higher interest rates. Credit opportunities funds are relatively riskier debt
funds.

g. Fixed Maturity Plans

Fixed maturity plans (FMP) are closed-ended debt funds. These funds also invest in
fixed income securities like corporate bonds and government securities. All FMPs have a
fixed horizon for which your money will be locked-in. This horizon can be in months or
years. However, you can invest only during the initial offer period. It is like a fixed
deposit that can deliver superior, tax-efficient returns but do not guarantee returns

There are broadly 3 types of investors. The adventurous ones who make leaps of faith
and choose equity investments is one. Two, those who play it safe and stick to debt
funds that assures some returns while keeping your money safe. Then there is the third
kind who wants the best of both. They go for Hybrid Funds.

1. What is a Hybrid Fund?

Hybrid funds invest in both debt instruments and equities to achieve maximum
diversification and assured returns. A perfect blend! The choice of hybrid fund depends
on your risk preferences and investment objective.

2. How do Hybrid Funds work?

Hybrid funds aim to achieve wealth appreciation in the long-run and generate income in
the short-run via a balanced portfolio. The fund manager allocates your money in
varying proportions in equity and debt based on investment objective of the fund. The
fund manager may buy/sell securities to take advantage of market movements.

3. Who should invest in Hybrid Funds?

Hybrid funds are regarded as safer bets than pure equity funds. These provide higher
returns than pure debt funds and are a favourite among conservative investors.
Budding investors who are eager to take exposure in equity markets can think of hybrid
funds as the first step. As these are an ideal blend of equity and debt, the equity
component helps to ride the equity wave.
At the same time, the debt component of the fund provides a cushion against extreme
market turbulence. In that way, you receive stable returns instead of a total burnout
that might be possible in case of pure equity funds. For the less conservative category of
investors, the dynamic asset allocation feature of some hybrid funds becomes a great
way to milk the maximum out of market fluctuations.

3. Types of Hybrid Funds

Hybrid funds can be differentiated as per their asset allocation. Some types of hybrid
funds have a higher equity allocation while others allocate more to debt. Let’s have a
look in detail.

a. Equity-oriented hybrid funds

When the fund manager invests 65% or more of the fund’s assets in equity and rest in
debt and money market instruments, it’s called an equity-oriented fund. The equity
component of the fund comprises of equity shares of companies across industries like
FMCG, finance, healthcare, real estate, automobile, etc.
b. Debt-oriented balanced funds
The debt component of the fund constitutes the investment in fixed-income havens like
government securities, debentures, bonds, treasury bills etc. An asset allocation of 60%
or more in debt and rest in equity is called a debt-oriented fund. For the sake of
liquidity, some part of the fund would also be invested in cash and cash equivalents.

c. Balanced Funds
Balanced funds invest at least 65% of their portfolio in equity and equity-oriented
instruments. This allows them to qualify as equity funds for the purpose of taxation. It
means that gains over and above Rs 1 lakh from balanced funds held for a period of over
1 year are taxable at the rate of 10%.
The rest of the fund’s assets goes to debt securities and cash reserves. So, conservative
investors can benefit from the return-earning capacity of equities without taking too
many risks. The fixed income exposure of balanced funds helps in mitigating equity-
related risks.

d. Monthly Income Plans

These are hybrid funds that invest predominantly in debt instruments. A monthly
income plan (MIP)would generally have 15-20% exposure to equities. This would allow
it to generate higher returns than regular debt funds. MIPs provide regular income to
the investor in the form of dividends. An investor can choose the frequency of
dividends, which can be monthly, quarterly, half-yearly or annually.
MIPs also come with the growth option – they let the investments grow in the fund’s
corpus. Hence, an MIP is not a mere monthly income investment. Do not let the name
mislead you. They are actually hybrid funds that invest mostly in debt and some amount
of equities.

e. Arbitrage Funds
An Arbitrage fund manager tries to maximize returns by buying the stock at a lower
price in one market. He, then, sells it at a higher price in another market.
However, arbitrage opportunities are not always available easily. In the absence of
arbitrage opportunities, these funds might stick to debt instruments or cash. By design,
arbitrage funds are relatively safer like most debt funds. But its long-term capital gains
are taxable like that of any equity fund.

5. How to Invest in Hybrid Funds?

You can invest in Hybrid Funds in a paperless and hassle-free manner at capital advisor
india. Using the following steps, you can start your investment journey:
1: Sign up for an account a capital advisor india.
2: You need to enter your details like the amount of investment and investment period
3: Get your e-KYC done in less than 5 minutes
4: Invest in your favourite hybrid fund from amongst the hand-picked mutual funds