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Equity funds invest in stocks. The objective of an equity fund is long-term growth through capital gains, although historically dividends have also been an important source of total return. They can be sector-specific, which only invests in stocks of specific sectors e.g. automobile, infrastructure, IT, etc. The Capital Gain becomes non-taxable if you keep the investment for at least a year. Equity Funds have a moderately high risk but are also considered better in terms of high return. Usually, there is 1% exit load if you take out money before the first year of investment is up.
Equity funds can be distinguished by several properties. Funds can have style, for example, value or growth. Funds may invest in sole securities from one country, or from many countries. Funds can also focus on the size of the company, that is, small-cap, large-cap, mid-cap. Funds that involve some component of stock picking are said to be actively managed, whereas index funds try as well as possible to mirror specific stock market indices.
When it comes to money management, financial experts always emphasize the importance of financial goals. These goals can either be short-term (1-3 years), medium-term (4-7 years) or long-term (more than 7 years).
Among equity funds, diversified funds have given mouth-watering returns for a decade or so. Investing in diversified equity funds is for those who want to invest across sectors. Among such funds, large-cap funds are known to give stable returns.
For those who are ready to risk, mid-cap funds stand a chance. And, for those who are willing to stomach a significantly higher risk than mid-caps, small-caps have performed well for the last three years.
One can expect a bonanza of gains if invested for the long term because of stability. For the short term (less than 3 years) one can't say anything as it can be as high as 50% or as low as 2%. People mainly invest in the long term to get fruitful benefits.
Returns from an equity mutual fund are treated as long term capital gains if investments are held for more than a year. Such returns are completely exempt from income tax according to the current laws. However, if investments are held for one year or less, the returns are taxed under short term capital gains. Such returns are taxed at 15 per cent.
There are certain schemes in equity like ELSS which can save you tax, but lock-in period is of 3 years. You can invest as much as you like in that scheme, but the maximum tax benefit is of Rs. 1.5 lakhs. Your salary will be taxed after deducting money invested in ELSS schemes (maximum Rs. 1.5 lakhs).
For other schemes, there is no such criteria and you can invest according to your will. One can start systematic monthly investment with as low as Rs. 500 in most funds though some mutual funds have higher minimum investment criteria.
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