If you’re a beginner looking to get started in investing, equity mutual funds could be the way to go. These funds pool together money from multiple investors to invest in the Indian stock market and offer the potential for high returns. But, it’s important to know that there are different types of equity mutual funds, each with their own investment strategy and risk level. So, let’s explore the world of equity mutual funds together!
Understanding Mutual Funds
What are Mutual Funds?
A mutual fund is a type of investment vehicle that pools money from multiple investors to purchase securities such as stocks, bonds, and other assets. The pooled money is managed by a professional fund manager who invests it in various securities with the aim of generating returns for the investors.
Each mutual fund is managed by an Asset Management Company (AMC) that is registered with the Securities and Exchange Board of India (SEBI). The AMC is responsible for managing the fund’s investments and ensuring that it complies with SEBI regulations.
Mutual funds are created by a Sponsor who is responsible for setting up the fund and appointing the AMC, Trustee, and Registrar. The Trustee is responsible for ensuring that the fund is managed in the best interest of the investors, while the Registrar maintains the records of the investors and handles the distribution of dividends and other pay-outs.
Types of Mutual Funds
There are several types of mutual funds available in India, each with its own investment strategy and risk profile. Some of the most common types of mutual funds are:
- Equity Funds: These funds invest primarily in stocks and are suitable for investors who are willing to take on higher risks for the potential of higher returns.
- Debt Funds: These funds invest in fixed-income securities such as bonds and are suitable for investors who are looking for a steady income stream with lower risks.
- Hybrid Funds: Also known as balanced funds, these funds invest in a mix of equity and debt securities and are suitable for investors who want to balance their risk and return expectations.
- Index Funds: These funds track a specific market index such as the Nifty 50 or the BSE Sensex and are suitable for investors who want to invest in the overall market without taking on the risks of individual stock selection.
- Fund of Funds: These funds invest in other mutual funds and are suitable for investors who want to diversify their portfolio across multiple asset classes and investment strategies.
Indian Equity Mutual Funds
What are Equity Mutual Funds?
Equity mutual funds are a type of mutual fund that invests in stocks of various companies. These funds are managed by professional fund managers who buy and sell stocks on behalf of the investors. In India, equity mutual funds are regulated by the Securities and Exchange Board of India (SEBI).
An equity mutual fund is a mutual fund scheme that invests predominantly in equity stocks. In the Indian context, as per current SEBI Mutual Fund Regulations, an equity mutual fund scheme must invest at least 65% of the scheme’s assets in equities and equity related instruments.
Types of Equity Mutual Funds in India
There are several types of equity mutual funds available in India. The following table lists and describes the different types of equity mutual funds:
| Type of Equity Mutual Fund | Description |
|---|---|
| Index Fund | An index fund is a type of passive fund that tracks a specific stock market index, such as the S&P BSE Sensex or Nifty 50. |
| Fund of Fund | A fund of fund is a type of mutual fund that invests in other mutual funds. |
| Active Fund | An active fund is a type of mutual fund where the fund manager actively manages the portfolio by buying and selling stocks in an attempt to outperform the market. |
| Passive Fund | A passive fund is a type of mutual fund that tracks a specific market index and does not try to outperform the market. |
| Flexicap | A flexicap fund is a type of mutual fund that invests in stocks of companies of all sizes, including large-cap, mid-cap, and small-cap companies. |
| Large-Cap | A large-cap fund is a type of mutual fund that invests in stocks of large-cap companies. |
| Small-Cap | A small-cap fund is a type of mutual fund that invests in stocks of small-cap companies. |
| Mid-Cap | A mid-cap fund is a type of mutual fund that invests in stocks of mid-cap companies. |
| Hybrid Fund | A hybrid fund is a type of mutual fund that invests in a mix of equity and debt securities. |
| ELSS | An ELSS (Equity-Linked Savings Scheme) is a type of mutual fund that offers tax benefits under Section 80C of the Income Tax Act. |
| S&P 500 | The S&P 500 is a stock market index that tracks the performance of 500 large-cap companies listed on the New York Stock Exchange or NASDAQ. Some Indian mutual funds invest in stocks listed on the S&P 500. |
Investors should choose the type of equity mutual fund based on their investment goals, risk appetite, and investment horizon. For example, investors with a long-term investment horizon may consider investing in large-cap or flexicap funds, while investors with a short-term investment horizon may consider investing in index funds or ELSS.
Benefits of Investing in Indian Equity Mutual Funds
Investing in Indian equity mutual funds can be a wise decision for those who want to grow their wealth over the long term. Here are some benefits of investing in Indian equity mutual funds:
Professional Management
One of the biggest advantages of investing in equity mutual funds is that your money is managed by professional fund managers who have years of experience in the financial markets. These professionals have access to a wide range of research tools and resources, which they use to make informed investment decisions on your behalf.
Diversification
Investing in Indian equity mutual funds allows you to spread your investments across a wide range of companies and sectors, which helps reduce the risk of loss due to any single company or sector performing poorly. This is because your money is pooled together with other investors, and the fund manager invests the money in a diversified portfolio of stocks or Index.
Potential to beat inflation
Equity mutual funds have the potential to beat inflation over the long-term. However, your asset allocation should also include investments in long-term debt instruments, based on your risk tolerance and risk preference.
Geographical Diversification
Indian equity mutual funds also offer geographical diversification, as many funds invest in companies that are based in different parts of the world. This helps investors benefit from the growth potential of companies in different regions, while also reducing the risks associated with investing in a single country or region.
Tax Benefits
Equity Linked Savings Scheme (ELSS) is a type of equity mutual fund that offers tax benefits of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act
Small Ticket Size
Investing in Indian equity mutual funds is also accessible to investors with small amounts of money. Most funds have a minimum investment amount of Rs. 500, making it easy for anyone to start investing and building their wealth over time.
Risks Associated with Indian Equity Mutual Funds
Investing in Indian equity mutual funds can be a great way to grow your wealth over time. However, it’s important to understand that there are risks associated with this type of investment. Here are some of the main risks that investors should be aware of:
Market Risk
One of the biggest risks associated with Indian equity mutual funds is market risk. This refers to the possibility that the value of your investment could decrease due to changes in the overall market. For example, if the Nifty 50 index (which tracks the performance of the top 50 companies listed on the National Stock Exchange of India) experiences a significant drop, the value of your mutual fund investment could also decrease.
Company Risk
Another risk to consider is company risk. This refers to the possibility that the value of your investment could decrease due to negative news or events related to a specific company that your mutual fund has invested in. For example, if a company experiences a scandal or financial difficulties, the value of your investment in that company could decrease.
Volatility
Volatility is another risk that investors should be aware of. This refers to the tendency of the market to experience large fluctuations in price over short periods of time. Volatility can be caused by a variety of factors, including changes in interest rates, political instability, and global economic events.
Concentration Risk
Concentration risk is the risk that a mutual fund is heavily invested in a particular sector, industry, or company. This can be problematic if that sector, industry, or company experiences a downturn.
Though more than 2000 companies were listed in the NSE as on March 2023, the top 100 companies contributed nearly 70% of the market capitalisation of the NSE.
FPI
Foreign Portfolio Investment (FPI) is another risk that investors should be aware of. FPI refers to the investment made by foreign investors in the Indian market. If foreign investors decide to pull their money out of the Indian market, it could lead to a decrease in the value of your mutual fund investment.
FOMO
Finally, investors should be aware of the risk of FOMO (fear of missing out). This refers to the tendency of investors to make investment decisions based on emotions rather than logic. For example, if a particular mutual fund has been performing well, investors may be tempted to invest in that fund without fully considering the risks involved.
How to Invest in Indian Equity Mutual Funds
Investing in Indian Equity Mutual Funds is a great way to grow your wealth over time. Here is a step-by-step guide to investing in Indian Equity Mutual Funds.
Step-by-Step Guide to Investing
- Know Your Customer (KYC) Compliance – Before investing in Indian Equity Mutual Funds, one must complete the CKYC (Central KYC) process. This is a one-time process that requires submission of identity proof, address proof, and PAN card.
- Determine Financial Goals – It is important to identify financial goals before investing in Indian Equity Mutual Funds. This will help determine the amount to be invested and the investment horizon.
- Asset Allocation – Based on the financial goals, one must decide on the asset allocation. Indian Equity Mutual Funds offer a range of options such as Index fund, large-cap, mid-cap, small-cap, sectoral, and thematic funds.
- Choose an AMC Portal – There are several Asset Management Company (AMC) portals available for investing in Indian Equity Mutual Funds. It is important to choose a reliable and trustworthy AMC portal.
- Choose a Mutual Fund – Based on the financial goals and asset allocation, one must choose a suitable mutual fund. It is important to read the scheme document and understand the investment objective, risk factors, and past performance of the mutual fund.
- Manual SIP – One can invest in Indian Equity Mutual Funds through a Systematic Investment Plan (SIP). Do a manual SIP every month after registering on the AMC portal.
- Payment Methods – Payment for Indian Equity Mutual Funds can be made through net banking, debit card, or cheque.
Online Platforms for Investing
There are several online platforms available for investing in Indian Equity Mutual Funds. Some of the popular ones are:
- Groww
- Upstox
- Zerodha
- Paytm Money
- ET Money
Investing in Indian Equity Mutual Funds has become easier with the availability of online platforms. However, it is important to do thorough research and choose a reliable platform before investing.
Whether you are an NRI or a resident, investing in Indian Equity Mutual Funds can help you achieve your financial goals.
Monitoring and Managing Your Investments
Investing in mutual funds is not a one-time affair. It requires constant monitoring and management to ensure that your investments are performing well and meeting your financial goals. Here are some tips on how to monitor and manage your Indian equity mutual fund investments.
Understanding Net Asset Value (NAV)
Net Asset Value (NAV) is the value of a mutual fund’s assets minus its liabilities. It is calculated by dividing the total value of all the fund’s assets by the number of outstanding units. NAV is the price at which you can buy or sell units of a mutual fund. It is important to monitor the NAV of your mutual fund as it reflects the performance of the fund.
Reading Fund Fact Sheets
Fund Fact Sheets provide detailed information about a mutual fund’s performance, portfolio, and fees. It is important to read and understand the fund fact sheet before investing in a mutual fund. The fact sheet provides information on the fund’s investment objective, asset allocation, top holdings, expense ratio, and performance.
TER
The Total Expense Ratio (TER) is the total cost of managing a mutual fund. It includes all the expenses incurred in managing the fund, such as investment management fees, administrative expenses, and marketing expenses. TER is deducted from the fund’s NAV, and it is important to keep track of the TER as it affects the fund’s returns.
Passive or Index funds have the lowest TER, as low as 0.2% to 0.4%, while active funds could have a TER of 1% or more.
Portfolio Risk
Investing in mutual funds involves risk. It is important to understand the risk associated with a mutual fund before investing in it. The risk associated with a mutual fund is determined by its asset allocation, investment objective, and portfolio holdings. It is important to monitor the risk associated with your mutual fund and adjust your portfolio accordingly.
MyCAMS
myCAMS is an online platform that allows investors to track their mutual fund investments. It provides a single view of all the mutual fund investments made by an investor. MyCAMS allows investors to view their portfolio, transaction history, and account statements. It also provides alerts and reminders for upcoming transactions.
Portfolio Rebalancing
Portfolio rebalancing is the process of adjusting the asset allocation of a portfolio to maintain its desired risk and return characteristics. It is important to regularly rebalance your mutual fund portfolio to ensure that it is aligned with your financial goals and risk tolerance. Portfolio rebalancing involves selling some assets and buying others to maintain the desired asset allocation.
Taxation on Indian Equity Mutual Funds
Investing in mutual funds can be a great way to grow your wealth. However, it is important to understand the tax implications of investing in mutual funds. In India, mutual funds are subject to different tax rates depending on the type of fund and the holding period.
Long-Term Capital Gains (LTCG)
If you hold your equity mutual fund units for more than one year, any gains you make will be considered long-term capital gains (LTCG). LTCG on equity mutual funds are currently taxed at 10% if the gains exceed Rs. 1 lakh in a financial year. However, it is important to note that this tax rate is subject to change with the Finance Act.
Short-Term Capital Gains (STCG)
If you hold your equity mutual fund units for less than one year, any gains you make will be considered short-term capital gains (STCG). STCG on equity mutual funds are currently taxed at 15% plus cess and surcharge. However, it is important to note that this tax rate is subject to change with the Finance Act.
Section 50AA
Finance Act 2023 refers to “specified mutual fund” under Section 50AA. Such a fund invests less not more than 35% of the fund proceeds in equity shares of domestic companies.
Effectively any investments in Fund of Funds investing in overseas markets would be taxed under this section and will not get any benefit of indexation for long-term capital gains.
Grandfathering
Grandfathering is a provision that allows investors to enjoy the benefits of the old tax regime even after the introduction of a new tax regime. In the case of equity mutual funds, grandfathering was introduced to protect investors from the impact of the new LTCG tax introduced in 2018. Under this provision, the LTCG tax is applicable only on gains made after 31st January 2018.
Finance Act 2023
It is important to note that the tax rates and provisions related to mutual funds are subject to change with the Finance Act. Therefore, it is important to stay updated with the latest tax provisions related to mutual funds.
Frequently Asked Questions
What are the best mutual funds to invest in India?
Choosing the best mutual funds to invest in India can be a daunting task for beginners. It is important to understand that there is no one-size-fits-all approach to investing in mutual funds. The best mutual funds for an individual depend on their investment goals, risk tolerance, and investment horizon.
How can beginners start investing in mutual funds online?
Beginners can start investing in mutual funds online by following these simple steps:
- Open a mutual fund account with a reputable fund house.
- Complete the KYC process by submitting the necessary documents.
- Choose the mutual fund scheme that aligns with your investment goals.
- Invest in the scheme through the online platform by linking your bank account.
What are the basics of mutual funds?
Mutual funds are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Investors can buy and sell units of a mutual fund scheme at a price that reflects the net asset value (NAV) of the underlying assets. Mutual funds offer various benefits such as diversification, professional management, and liquidity.
Which SIP is best for beginners?
Systematic Investment Plans (SIPs) are a popular way to invest in mutual funds. Beginners can start with a small amount and gradually increase their investment over time. The best SIP for beginners depends on their investment goals, risk appetite, and investment horizon. It is important to choose a scheme that has a track record of consistent performance and aligns with your investment goals.
How can I choose mutual funds as a beginner?
Choosing mutual funds as a beginner can be overwhelming. Here are some tips to help you make an informed decision:
- Determine your investment goals and risk tolerance.
- Choose a mutual fund category that aligns with your investment goals.
- Look for schemes with a consistent track record of performance.
- Consider the fund manager’s experience and track record.
- Check the expense ratio and other fees associated with the scheme.
How can I make 1 crore in 5 years through mutual funds?
Making 1 crore in 5 years through mutual funds is highly improbable. Investing in mutual funds can be profitable in the long run but it is necessary to align your expectations with reality.
