EQUITY FUNDS

What is an Equity Fund?

Equity mutual funds try generating high returns by investing in the stocks of companies across all market capitalizations. Equity mutual funds are the riskiest class of mutual funds, and hence, they have the potential to provide higher returns than debt and hybrid funds. The performance of the company plays a significant role in deciding the investors’ returns.

 Features of Equity Funds

a. Cost of investment

The frequent buying and selling of equity shares often impact the expense ratio of equity funds. The Securities and Exchange Board of India (SEBI) has capped the expense ratio at 2.5% for equity funds. A lower expense ratio will translate into higher returns for investors.

b. Holding period

Investors earn capital gains on the redemption of their fund units. The capital gains are taxable in the hands of investors. The rate of taxation depends on how long one stays invested and this period is called the holding period.

 Equity holdings of less than one year are termed short-term, and short-term capital gains are taxed at 15%. Equity holding of more than a year are termed long-term, and the long-term capital gains are taxed at the rate of 10% if the gains exceed Rs 1 lakh a year.

c. Cost-efficiency & diversification

By investing in equity funds, you get exposure to several stocks, and you get this benefit by investing a nominal amount. However, your portfolio will face the risk of concentration.