By Namrata Singh, CFP & Chaitali Shah, MA (Economics)

Equity Mutual Funds allocate their funds into stocks of various companies. According to SEBI regulations, these funds must invest a minimum of 65% of their assets in equity and equity-related instruments.

These funds are for long-term wealth creation, have the potential to outpace inflation and generate substantial returns over extended investment periods. They can be categorized as follows:

• ~ Large Cap Funds:
  • – Invest in the top 100 companies by market capitalization.
  • – Provide a margin of safety relative to other mutual fund categories due to their focus on established companies.
• ~ Mid Cap Funds:
  • – Invest in companies ranked between 101 to 250 in terms of market capitalization.
  • – Pose higher risk than large caps but lower risk than small cap funds.
• ~ Small Cap Funds:
  • – Invest in companies beyond the top 250 in terms of market capitalization.
  • – Considered riskier than both large and mid-cap funds.
• ~ Large & Mid Cap Fund:
  • – A combination of large and mid-cap funds.
• ~ Multicap Fund:
  • – Allocate funds across market capitalizations – ie Large caps, Mid Caps and Small caps in definite proportions.
• ~ Index Funds:
  • – Passively managed funds that mimic an index.
  • – Cost-effective with the lowest expense ratio.
• ~ Sectoral/Thematic Funds:
  • – Invest in specific sectors like Banking & Finance, IT, Infrastructure, etc.
  • – Considered the riskiest among the mentioned categories.

Dividend Yield Funds:

• – Fund that mostly invests in companies that pay regular dividends.
• – Dividend income is taxable for dividends received as per individual’s tax bracket.

ELSS Funds:

• – Equity Linked Savings Scheme (ELSS) Funds are tax-saving equity mutual funds locked in for 3 years. From the date of investment.
• – Tax exemption is available on the invested amount under 80C of the Income tax Act.

It’s crucial to choose a fund aligned with one’s investment goals after understanding the objectives of each fund type.

Tax on Equity Mutual Funds

Profits made on mutual fund investment are taxed under the Head – Income from Capital Gains.

• ~ Investment held for less than 12 months is taxed at 15% as short term capital gains.
• ~ Investment held for more than 12 months is taxed at 10% as long term capital gains. Long term Capitals Gains up to Rs. 100,000/- are exempt from taxes  per Financial Year

Avoiding these five common mistakes is imperative for successful investments in equity mutual funds:

1. Not Understanding Personal Risk Appetite:

• ~ Essential to assess and align investments with one’s risk tolerance.
• ~ Risk-averse investors should consider alternative investment options.

2. Investing Without Goals:

• ~ Investing solely for returns without specific goals can be counterproductive.
• ~ Equity investments require patience due to non-linear returns.

3. Making Investments Without Understanding:

• ~ Basics of mutual funds should be comprehended before making investment decisions.
• ~ Avoid following trends without understanding individual circumstances.

4. Trying to Time the Market:

• ~ Timing the market can lead to missed opportunities.
• ~ SIPs provide a disciplined approach to navigate market cycles.

5. Investing Without Emergency Funds:

• ~ Maintain emergency funds before investing in equities.
• ~ Ensure financial security before committing to long-term equity investments.

One can start an equity mutual fund investment journey with only Rs. 500/-, with a recommended investment horizon of 5-7 years. Investors who are not well-versed in direct stock picking and portfolio management can choose to invest into the stock market through the Equity Mutual Fund Route.

Our decision to invest into mutual funds should be in sync with our risk appetite, investment horizon and financial objectives.

Disclaimer: Investments in mutual funds are subject to market risks.

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Namrata Singh is a Certified Financial Planner with more than 15 years of experience in banking and wealth management. (namrata@asinvestment.in)

Chaitali Shah, MCom & MA (Economics) is a Financial Coach and was a Financial Economics Faculty at Wilson College, Mumbai (info@wealthron.com)