Gold ETF: Which is a better investment bet, gold or gold ETFs?

Gold is the most popular metal in India as it considered auspicious and used in various religious ceremonies in India. For centuries, gold has been seen as an investment tool and also purchased for financial safety. India is one of the top countries in the world when it comes to demand for gold. India stands only second to China today in spending of Gold, but it won’t be surprising that India dethrones China in the future to become number one consumer of Gold. In today’s day and age, investing in gold is not limited to buying physical gold ornaments or gold biscuits. You can invest in gold digitally through gold ETF. This article will help you to decide which is a better investment bet, physical gold or gold ETF.

Gold Exchange Trade Fund or Gold ETF

Gold Exchange Trade Fund is a mutual fund scheme that is open-ended and changes as per the fluctuating cost of gold in India. There are no making charges involved in Gold ETF and the income it generates for you, can be monitored on daily basis. Gold ETF can help beat inflation in the long-term and is a much safer bet than equities which are more volatile in the market. A value of one unit of Gold ETF is equal to 1 gram of gold. Gold ETF provides the investor dual benefit of investing in the financial market as per investment in gold. The return on gold ETF is made when the gold prices rise and due to the digital nature of investment, there is no disadvantage with regards to the purity of gold. It remains uniform and is a more transparent financial product throughout the country.

How Gold ETFs work

Buying Gold ETF is like buying actual gold, but in the digital sense. For example – when you buy Gold ETF, the entity that is selling Gold ETF actually buys the gold at the back-end. They also give guarantee about the purity of the gold.  Gold Benchmark Exchange Traded Scheme (Gold BeES) is registered with NSE (National Stock Exchange).  These schemes carefully follow the market trend, the cost of gold trade in India. NSE assigns an authorised body to see over the sale and purchase of gold to create ETFs. The authorising body comprises of notably large companies. Due to the compliance and procedure in place, cost of physical gold and Gold ETF remains identical for the benefit and transparency of the investors.

When to purchase gold in physical form

Industry experts say that it is better to invest in gold mutual funds in India funds scheme unless the gold is needed in physical form for personal use or in an event like marriage. There are many benefits of investment in demat form and the most evident is no chance of theft.  Investment in Gold ETF can be started for as low as INR 1000 a month.

Why to avoid physical gold

Gold ETF give better returns as compared to physical gold purchased, as it does not involve making charges of the jeweller. The funds are also highly liquid and can be redeemed anytime. Physical gold carries many additional expenses on the actual investment which make it difficult to get good returns and defeats the purpose of investment.

As we know now that investment can be done in two different ways, one is a physical purchase of gold and the other is through Gold Exchange Trade Fund. Let’s discuss the details of the difference between the two in the below table:

	Gold (physical gold)	Gold ETFs
Meaning	The investor buys the gold in physical form from a retail store. The purity of gold may not adhere to the standard purity requirement of 99.5%	An open-ended exchange traded funds, Gold ETF invests the money in certified gold bullion (gold purity of 99.5%).  The value of the units allotted to the investor depends on physical gold traded in the market.
Pricing	The cost of physical gold is not standard and it depends from jeweller to jeweller.	Gold ETFs cost is as per international standards and are standard throughout the country.
Affordability	Gold biscuits come in the standard denomination of 10 grams which require a big investment	Gold ETF are much more affordable as the units value start from 1 gram.
Additional charges on investment	When investing in physical gold through ornaments, an investor has to pay 20% to 30% in making charges of the total value of the asset. There are further government taxes levied during billing of the product.	They are comparatively less expense in purchasing Gold ETF. The expense ratio is only 1% every year of the total asset value and brokerage fees is around 0.5% per transaction.
Wealth tax	Investor will have to pay wealth tax of 1% if the cost of the gold possessed by the investor exceeds INR 30 lakhs	There is no wealth tax payable by the investor on Gold ETFs.
Short-term capital gain tax	If the gold is sold by the investors before completion of 3 years, then short term capital gain tax will be applicable as per the prevailing Income Tax rules and regulations.	Short term capital gain clause is the same even for the Gold ETF
Long-term capital gain tax	If the gold is sold by the investor after the completion of 3 years, then long term capital gain will be applicable as per the prevailing Income tax rules and regulations.	The long-term capital gain tax clause is same for Gold ETF as for physical gold.
Liquidity	Physical gold can be purchased through banks and jewellers. It can although only be sold through jewellers. The buying is predominately done offline by going to the jewellery shops.	Gold ETF can be purchased online from a website and the whole process of buying has become simpler with an online platform. It can also be sold easily as it is traded on NSE and BSE. The whole process is regulated and hence, chances of fraud are also less.
Returns calculation	The actual returns are calculated by the current market price of gold minus the purchase price which includes the making charges and tax.	The actual returns are calculated by the current market price of unit of gold ETF minus buying price and commission paid.
Demat account requirement	There is no need for demat account to purchase physical gold	To purchase gold ETF, an investor first needs to open a demat account

Conclusion

If you are purchasing gold for investment, then Gold ETF is the way forward. There is no risk of impurity or thefts as the investment of Gold ETF is in your demat account. The returns on the Gold ETF are also more as there are no hefty making charges involved. Gold ETF also has more transparency and are safe to invest as they are robustly regulated than physical gold transactions. Hence, gold ETF makes for a better bet in today’s world of internet and digitalisation.

Check out How Your Mutual Fund Investments Are Taxed

As a financial instrument, mutual funds are widely considered to be secure, sustainable, and reliable. This is primarily because they are professionally managed, offer a diverse portfolio and are largely cost-effective.

However, a number of people are concerned whether the tax saving mutual funds, actually help to save taxes or it’s just a publicity gimmick. Although there are a number of exemptions and deductions available on most funds, investors aren't usually aware of such details. All they tend to know is that mutual funds aren't taxed at the source. What they aren't told is that even without TDS, investors are not released from the obligation of mentioning the gains that accrue from tax saving mutual funds when they file their IT returns.

This is why it is important to know how mutual fund investments are taxed in India.

What of Taxation?

In India, there are a few essential types of taxation. These are:

- Capital gains- A capital gains tax is charged on the profits or gains which accrue on a mutual fund investment over a certain period.

- Dividend Distribution Tax (DDT)- If your mutual funds yield dividends, the fund house deducts a dividend distribution tax before paying them to you.

- Securities Transaction Tax (STT)- When you sell a mutual fund, an STT is levied at the rate of 0.001%. It is charged on the sale of both, equity and hybrid funds.

So, whether you invest in Equity linked saving scheme (ELSS) mutual funds or any other form of tax saving mutual funds, you will be subject to these three type of taxes. Nevertheless, the specific rate of taxation will vary according to the type of fund that you have invested in and its total holding period.

What Is the Holding Period?

When it comes to tax saving mutual funds, the holding period is defined as the amount of time for which the fund has been held by an investor. It can either be long-term or short-term.

The current guidelines in this regard are:

- Equity Mutual Funds- A period greater than 12 months is considered to be long-term while a period lower than 12 months is considered to be short-term.

- Balanced/Hybrid Mutual Funds- Their holding period is exactly the same as equity mutual funds.

- Debt Mutual Funds- For these, a period greater than 36 months is considered to be long-term whereas a period lower than 36 months is defined as short-term.

- International Funds- The holding period of mutual funds in the international category is just the same as debt mutual funds.

- Other Hybrid Funds- For other funds, if more than 65% of their assets are invested in equity, their holding period would be similar to equity funds. If less than 65% of assets are invested in equity, their holding period would be the same as debt funds.

How Are Mutual Funds Taxed?

The taxation process for the entire mutual fund portfolio can be better understood by undertaking an individual analysis of all the fund types. These include:

Equity Funds

These funds can generally be divided into two types, namely tax saving mutual funds and non-tax saving equity funds.

In the non-tax saving equity funds category, the first Rs.1 lakh earned is completely tax-free. However, a long-term capital gains tax (LTCG) is charged at a rate of 10% at every profit sum earned thereafter. No benefit of indexation is provided. Also, a short-term capital gains tax (STCG) of 15% is levied, if the fund is held for less than 12 months.

In the tax saving mutual funds category, the ELSS mutual funds, are the most efficient vehicles. Under section 80 (C) of the Income Tax Act, 1961, the ELSS mutual funds, which come with a lock-in period of three years offer a tax deduction of about Rs.1.5 lakh.

The dividends obtained on equity funds are taxed at a rate of 10%, whereas the dividends of non-equity funds are levied a tax at the rate of 28.84%.

Debt Funds

The LTCG on debt funds is charged at a rate of 20%. Nonetheless, these rates are subject to indexation. In simple words, indexation is a mechanism which helps to factor in the cost of inflation which occurred between the time when the fund was initially bought and the time when it was finally sold.

The SCGT is not separately charged on profits from debt funds. Instead, it is included within the income tax which is levied on you depending on which specific taxation slab you fall under.

Balanced/Hybrid Funds

The balanced or hybrid funds are tax saving mutual funds as they are treated in exactly the same way as their equity counterparts. You can even purchase the ELSS mutual funds via the balanced fund route if more than 65% of their assets are invested in equity. 

Non-Resident Indians

Unlike other tax saving mutual funds, a TDS is charged from the funds purchased by non-resident Indians. Moreover, STCG and LTCG are also levied upon them. The tax rate for both, equity and debt funds varies for NRIs in the following way:

- Equity (Short-term)- 15%

- Equity (Long-term)- 10%

- Debt (Short-term)- 30%

-  Debt (Long-term)- 20%

Systematic Investment Plans

Last but not least, the systematic investment plan (SIP) is a method which allows the investment of a fixed amount periodically in any mutual fund. This period may range from a fortnight or a month to a quarter or even a year. From the taxation point of view, every SIP is treated as a fresh investment and thus, gains made from each one of them are taxed separately. This can be better understood with the help of an example.

Consider that you begin investing Rs. 10,000 per month as an SIP. After the completion of 12 months, when you want to redeem your money, only the first investment made in the first month and the gains which have accrued from it will be tax-free. The gains procured on all subsequent SIPs would be subject to STCG. This is because, after 12 months only the first SIP would have completed a year. Every other SIP would be treated as a new investment.

The Road Ahead

If the aforementioned taxation system still appears to be too complex, you can easily seek assistance from online platforms like Coverfox. Not only would they help you in determining your total tax liability, but they would also guide you to effectively invest in the best tax saving mutual funds.

Whether you choose to go for an SIP or an ELSS mutual fund, if your primary purpose is tax efficiency, you should try to seek sound advice and proceed cautiously. After all, it is only wise investments which can lay the foundation for high and tax-secured returns.

What are Balance Mutual Fund and Hybrid Fund

Hybrid funds are mutual funds that invest in both Equity and Debt Market to provide good returns and are the perfect mixture of diversification. The asset allocation can vary depending on the requirement i.e. it could have high equity allocation, or balance of debt and equity depending the type of investor one is i.e. risk taker or a conservative investor.

A balanced fund is a form of the hybrid fund and suitable for first-time investors. They invest in multiple assets to protect the investor from volatility, if one asset class has some issues.   Investors who are not to open to take risk are best suited for investment in a balanced fund with present limitations of equity and debt allocation.

How do Hybrid Funds work?

Hybrid funds offer investors a diversified portfolio. They aim at achieving appreciation in long run and generate income in short run via a balanced portfolio. They maintain an investment ratio of 60% - 40 % in equity and debt instrument, with a majority in either of the two. If asset allocation is more than 65 % in equities, then it is equity oriented fund and if the 65 % is allocated to debt, then its debt oriented fund. To maintain liquidity, a part of the fund will also be invested in cash and cash equivalents. These funds are basically a platform for income generation and capital appreciation. The allocation of your money is done by the fund manager basis the objective of the fund and investor.  The fund manager will also sell/buy securities to take advantage of market movements.

Industries like FMCG, finance, healthcare, real estate, automobile, etc. provide equity shares which are part of the equity component of the fund.  The debt component of the fund contains investments in fixed income like government securities, debentures, bonds, treasury bills, etc.

 Who should invest in Hybrid Funds?

New mutual fund investors prefer the hybrid funds, since they are safer bets than pure equity funds. The debt component of the fund provides a cushion against a volatile market while providing decent returns which is best suitable for the conservative category of investors.  They provide higher returns than pure debts and new investors can always choose them as the first step. Since they have a blend of equity and debt, the equity component helps to ride the equity wave.

Types of Hybrid Funds:  They can be differentiated as per their asset allocation. There are different equity and debt allocation in different types of hybrid funds, some may have higher equity allocation and others may have high debt allocation. Below are more details on the types of hybrid funds.

Balanced Funds

Balance funds are one of the most common types of hybrid funds. The investment in balanced funds is done majorly in equity or equity-oriented investments. Balanced funds are a good bet for risk-averse investors. As balanced funds majorly invest in equity funds, they get the same tax treatment of equity funds. As per the updated rules of 2018, an LTCG (Long Term Capital Gains) tax of 10% is applicable if the capital gains of the investor are more than INR 1 lakh in a financial year

.

 Monthly Income Plans

These funds mostly invest in debt instrument with around 15% to 20% exposure to equities. The reason behind equity exposure is to generate better returns than debt funds. Monthly income plans distribute income through dividends to investors. These plans also offer growth option to the investor.

Arbitrage Funds

Arbitrage funds use the advantage of the pricing difference of the securities in the derivatives and futures markets to generate good returns. However, the flip side is that the opportunities are not much and the funds will stay invested in equity or debt market. Arbitrage funds are treated as equity funds for taxation purpose and thus LTCG tax is also applicable to them.

Things Investor should consider before investing

 Risk

Even though hybrid funds have maximum percentage allocated to debt instruments, this does not mean they are not completely free from risk. There is still an equity component that is exposed to the market volatility.  Due to changing markets, the fund value fluctuates as per the underlying value of the benchmark. Although balanced funds are safer proposition than equity funds, an investor needs to exercise caution and rebalance portfolio regularly to gain maximum out of the investment.

Cost

Mutual fund houses charge an annual fee charged for managing the portfolio of the mutual funds which is known as the expense ratio. It is calculated as per the fund’s average assets. The expense ratio shows the operating efficiency of the funds and is an important criterion for investors, when choosing a mutual funds. It is a good idea to compare the expense ratio of funds falling in the same category. Lower expense ratio will translate into higher take-home returns for the investor.

Tax on Gains

Taxation on the balance funds works as per the orientation of the fund. The equity-based balanced funds get the same treatment of tax as a pure equity fund. If the investment in the equity-based balanced fund is more than a year, then it will be treated as long-term capital gain. Long-term capital gain (LTCG) in excess of INR 1 lakh on equity component will be taxed at the rate of 10% without the benefit of indexation. There is a tax rate of 15% on short-term capital gains of equity-based balanced funds.

Investment Horizon

Balanced funds are the best bet for the kinds of investors who would usually choose to invest only in bank fixed deposit for 5 years. Balanced funds have the potential to deliver higher returns than a bank fixed deposit in a 5 year or a higher duration of time. In addition, an investor will also get the benefit of indexation on the long-term capital gain.

 Financial Goals

Balanced funds are best for financial goals set for a period of 5 to 7 years. For example - a financial goal of buying a car or funding for the higher education. Balanced funds are also great for new investors or for people who do not have time to actively manage portfolio or have a low-risk appetite. Senior citizens or retired investors can choose to invest in balanced funds and use dividend option that will help in post-retirement income.

Return

Balanced funds are meant for investors who have a low-risk appetite. In the past, equity-based balanced funds have delivered average returns in the range of around 10% to 12%. Even though there is a component of debt in balanced funds, there is no surety on the returns. Depending on the performance of the securities, the NAV of the fund will fluctuate.

Best value-oriented equity mutual funds to invest in 2018

The value mutual funds come with a diversified portfolio and growth-oriented stocks. They follow a constructive strategy for receiving good returns all over the market cycles. It is essential to choose the right MF to secure good returns.

The value-based funds are the best way to invest in undervalued stocks and receive potential growth and handsome returns. Through this option, the investors are in the hold of stocks till the day when the precise value of these stocks is realised in the market. You may have come across the names of Aditya Birla Sun Life Pure Value Fund or Tata P/E Fund but do you know where to invest?

Let us have a look at the best equity mutual funds for generating wealth creation to save the future.

Investing in the Best Equity Mutual Funds of 2018

The value-oriented funds have low-level of downside and they concentrate on trading stocks at a discount. They reduce the risk and assure potential growth by holding the stocks for a long period. The experts suggest having at least 10% of the portfolio on the value-based mutual funds for increasing the benefit of diversification in the portfolio.

The funds may witness under-performance but they guarantee high returns. It is widely suitable for the patient investors. Take a look at the following table for understanding the performance of the best equity mutual funds.

Mutual Funds	5-year Return	3-year Return	1-year return
Tata P/E Fund	25.4%	18.3%	11.6%
HDFC Capital Builder Value Fund	20.9%	15.2%	14.8%
L&T India Value Fund	25.5%	16.8%	6.1%
Aditya Birla Sun Life Pure Value Fund	28.5%	19.5%	11.2%

Tata P/E Fund

For the investors seeking long-term appreciation, this is one of the best mutual funds. It invests in equity-related and equity instruments of various companies only where the rolling P/E is not more than the rolling P/E of S&P BSE Sensex.

Categorised in the value fund, the open ended equity scheme offers regular and reasonable capital appreciation to an investor. There is no confirmation that the mutual fund investment objective may be achieved due to the no assurance on the returns.

The long-term record of Tata P/E Fund displays that within 10 years of return, the MF has outperformed the category. 12.72% is the average return of category but the fund has provided 15.16% of the return. Also, it has provided more than double of the benchmark return rate.

The minimum rate of mutual fund investment starts at Rs.5,000 and the expense ratio is 2.68%. There is no entry load but the exit load is 1% for the redemption in a year. This value-based equity fund is not particularly sector-biased but it still is a higher large-cap in comparison to its peers.

HDFC Capital Builder Fund

This MF is an equity-linked growth scheme which is only suitable for the long-term unit-holders. HDFC Asset Management Company has initiated the plan to boost long-term capital appreciation only by investing in equities of the blue-chip companies.

The blue-chip companies are acknowledged for their competence and integrity. They generally have surfeit cash generation and offer high profitability on the investments of mutual funds. HDFC Capital Builder Value Fund considers energy, financial and tech industries mainly. BPCL, Larsen & Toubro Ltd., ICICI Bank Ltd., Infosys Ltd., and Grasim Industries Ltd. are few of the companies that have invested.

The value of the asset under management is more than Rs.3644.53 cr. NIFTY 500 total return index is the benchmark. It is to note that the fund has surpassed the benchmark returns along with moderate category returns. The long-term track record shows the high mutual fund returns being primarily suitable for the investors with a high risk appetite.

As it is one of the efficient best equity mutual funds, the scheme has outperformed the benchmark 4%-6% in the 1-5 year(s). It has also surpassed the average rate of the category by 5%-8%. Since the beginning of the scheme, the fund has been able to provide a 15.15% return per year.

L&T India Value Fund

Launched in 2009, the fund invests in the undervalued stocks for generating long-term capital appreciation and risk-adjusted returns. The scheme analyses the financial strength, business prospects, stock valuation, competitive advantage and potential earnings at the time of choosing stocks.

Now the fund has more than Rs.7,638.71 cr asset under management and its benchmark is S&P BSE SENSEX. The top holding companies invested in the scheme are ICICI Bank Ltd., Infosys Limited and Reliance Industries Limited.

Apart from the Indian market, one of the best equity mutual funds 2018 also invests in the foreign securities of the international market. There is no entry load for the best equity mutual funds but 1% exit load is allotted within one-year of purchasing the fund.

L&T India Value Fund has outshined the category by 6%-14% and outperformed the benchmark by 6%-11% in three and five years of return. It has also provided 16.49% annualised returns since the launch. The systematic investment plan estimated Rs. 5,000 per annum in the fund initiated five years, is now worth of Rs.5.12 lakh.

Aditya Birla SL Pure Value Fund

If you are looking for one of the best equity mutual funds guaranteeing long-term capital growth, this is the one. It is an open-ended equity fund which is included in the under-value category. The minimum range of investment is Rs.1000 and the current NAV is Rs.51.572 cr.

Started in 2008, it looks forward to the business widely overlooked by the market offering high-level of safety. In this way, Aditya, Birla Sun Life Pure Value Fund secures potential growth. Nonetheless, the scheme tends to tilt towards the small-cap and mid-cap categories where the mispricing generally tends to be too accurate.  

Over the years, like other mutual funds, Pure Value Fund has enlarged the corpus leading to a diversified portfolio. It looks for new value ideas for resulting in a high portfolio churn. The consistent track record has paved the avenue for decent returns and high volatility in the market. Generally, this type of mutual funds is approached by aggressive investors.

Why tax-saving mutual funds are the best way to save on taxes

You can’t grow long term if you can’t eat short term; one can always manage short and long-term goals as independent as it can be. The art lies in balancing both your short and long-term goals successfully.  Many of us plan our retirement and needless to say it’s one thing that isn’t in our list of things. We focus on saving tax every year, but we need to better manage it to achieve our long and short team goal. Tax saving should be done in two parts i.e. first save tax for the year and next, invest in funds for your retirement.

So the next question obviously is, do we have instruments that will help us save tax and plan our future. Yes, we have an equity-linked saving scheme or as we call it ELSS of mutual funds.  In Income Tax Act, under Section 80 C, one can invest up to INR 1.5 lakh for a financial year. One can always invest more than INR 1.5 lakh, but it won’t qualify for tax benefit.  There was a recent announcement that the return generated from ELSS will become taxable with the dividend distribution tax and taxes on the long-term capital gain. In spite of the changes, it’s a good option for young earners who are starting to save for retirement and tax. The benefit of ELSS is short lock-in period and provides the potential for growth via equity.

Understanding Equity Linked Saving Schemes

ELSS is equity diversified mutual fund scheme with a lock-in period of three years from the date of investment. Post completion of the lock-in period, the scheme turns into an open-ended scheme and one can withdraw the fund. It’s better to keep the funds invested considering your long-term goal of retirement. These funds are managed by fund managers who are experienced finance professionals with a better understanding of the benefits of tax saving, plus are offered by fund houses. It’s important to decode why ELSS is a better investment under Section 80 C to save tax.

Types of ELSS

ELSS has two main categories of funds i.e. Dividend and Growth fund.  Dividend Fund is further subdivided to Dividend Payout i.e. you will receive the dividend tax-free and Dividend reinvestment i.e. your investment will be reinvested as a fresh investment. Growth Fund provides long-term wealth creation platform for investors where the full value of the fund is realised at the time of redemption.

How ELSS is better than all other 80C Investments             

ELSS still is considered one of the best options to invest even though the returns are being taxed as per the new guidelines.  Returns attract long-term capital gains from ELSS, but they should still continue to be part of your investment portfolio as per the industry experts. These are equity-based investment instruments that provide the potential of higher returns considering the long-term scenarios. In comparison to other investment options like PPF and ULIPS, post-tax returns are better for ELSS.

Short lock-in period: This is one of the attractive aspects of investing in ELSS in comparison to other tax saving investment option. The lower lock-in period is beneficial to an investor. Whether it is Public Provident Fund, Employee Provident Fund or National Saving Certificate (NSC), all required a minimum lock-in period ranging from five to fifteen year where ELSS stands at a minimum of a three-years.

High Returns on Investment (ROI): We all invest to gain profit, increase our savings and of course, hopes to fulfil our aspirations. Since ELSS is invested in equity markets, the returns are much higher than other investment options.  While we save tax, these profits earned in long run is a better option of investment in Section 80 C with a focus on not too short or mid-range of investment duration. Public Provident Fund provides eight percent returns, while ELSS can generate anything in the range of ten to twelve percent in a period of ten plus years. The returns from NSC and other life insurance schemes are also less than of ELSS.

Flexibility with ELSS:  ULIP’s don’t provide flexibility of ELSS; in case we are not okay with the ELSS fund, one can always moved to another fund since there is no multi-year commitment. With ULIP non-performance, one can move or invest in funds that are offered only that ULIP. It’s true that ULIP can also provide similar returns like that of an ELSS and are sold at a low cost by insurance firms directly.

Benefit of Combining ELSS and PPF: This is a solid combination since together, they cover the stability of PPF and earning a potential of ELSS.  The next advantage is that you combine debt and equity both in your investment portfolio with government-backed security and opportunity of growth through fund house.

 Protection in times of volatility:  Since the lock-in period if of three years, it helps to build a discipline and stay away from fear of changing your fund house too frequently.  In terms of changing market’s, they act as a strong shield to weather the volatility that comes with investing in stock markets. In simple terms, it enjoys the benefits of market high and has provisions to reduce the impact of marker low.

Things to know about ELSS before you invest

Before we even start with our selection of ELSS, tax saving mutual funds, one should know how much to invest, duration and the objective of the investment i.e. is it for saving tax or your retirement or your dream house goals?

Look at your earning, spends and time frame to achieve your goal, inflate the expenses and see how much surplus you have to start investing.

Selecting your ELSS isn’t a simple task since we have multiple options like Large Cap, Mid Cap or Multi-Cap Stocks. It will be good to diversify across on not more than 2 to 3 ELSS with variation in industry and market capitalisation.

It is crucial to consider all facts about the fund and your financial objective before investing. One should keep reviewing the performance of schemes after the lock-in period is completed. Don’t look at funds in isolation, look at its benchmark return with consistency to beat its benchmark and at the category average returns will tell how good or bad is your investment against its peers.  Don’t look at a short-term run; incentivise your long run by balancing your investment goals.

All the Information about Equity Funds

One place where you can always find the definition of money is a dictionary. But one place where you can invest your money for earning a long-term profit is equity mutual funds.  With Equity mutual funds, you will not only find money, but will also have the capacity to spend for yourself and family. To begin, you must be thinking that you definitely know the word equity and mutual funds is where you must invest to save tax every year. So how does these two combine? Hence, let’s start by deep diving on equity mutual funds.

Equity Fund is a mutual fund that invests principally in stocks or shares of companies.

Management of equity mutual funds can be done either actively or passively.

While managing an active fund, the fund manager needs to scan the market, conduct research on companies, scrutinize performance and keeps an eye on the best stock to invest.

For Passive, the fund manager puts together a portfolio which is similar to popular market index i.e. Sensex or Nifty Fifty.

TYPES OF EQUITY FUND

There are many types of Equity funds which can be further categorised based on their investment mandate and the kind of stocks and sectors they invest in.

Equity funds can also be classified as domestic or international which can be broad market, regional or single country funds.

To name a few equity mutual funds, details are mentioned below:

A) Basis Market Capitalisation:

Equity funds are also divided basis market capitalisation i.e. how much the capital market values the equity of an entire company. They limit investments to Micro Cap, Small Cap, and Medium Cap, Large Cap or mega-cap companies.

Large Cap equity funds belong to large-cap companies which are well-established companies and hence, these are reliable plus stable investments.

They primarily invest in large-cap stocks of the biggest listed companies of the economy.

Mid Cap equity funds and Small Cap equity funds belong to midsize and smaller companies respectively. Additionally, one can always invest their funds in both mid cap and small cap naming them as mid-cap & small-cap funds

The returns are fluctuating due to volatility in smaller companies.

 Multi-cap funds are equity funds that invest across market capitalisation which is in large, mid and small cap stocks.

B) Basis Sector and Themes:

Further classification for equity mutual funds is diversified where the scheme invests in stocks across the entire market spectrum or Sectoral /Thematic is restricted to only a particular sector or they say infrastructure or theme.

Sector equity mutual funds particularly invest in one industry i.e. Pharma/FMCG /Technology.

Thematic equity mutual funds are those following a particular theme like emerging consumer companies or international stocks.

Since these are concentrated in particular sector, they tend to be riskier than diversified equity funds.

C) Index Funds

Equity funds that follow a particular index are called index funds which are passively managed funds that invest in the same companies in the exact same proportion that make up the index that fund follows.

For example, a Sensex index fund will have investments in all 30 Sensex companies in the same proportion in which the companies form part of the index. Index funds do not cost much as they don’t require to be managed actively by the fund manager.

Equity fund essentially invests in company shares and aims to provide the benefit of professional management and diversification to ordinary investors.

HOW DO EQUITY FUNDS WORK?

 It’s actually pretty simple; you give your money to a fund which invests in stocks. There will be gain or loss which will accumulate to your account. This is the bare minimum information that one needs to invest in equity mutual fund.

The word mutual in the name exactly means what it indicates, i.e.it is composed of the money that a huge number of people have invested and the way law, rules & regulations have designed is that all investors are exactly equal financially and are treated the same way.

The way this fund is designed is that an equity fund invests 60 percent or more of its assets primarily in equity shares of companies in different proportion as per the investment mandate. This investment might be in any variety of mutual funds i.e. large or sectoral with variation in investing style as value or growth oriented.

After investing a major portion in equity shares, the remainder amount might be invested in debt or money market instruments. This investment will also help in redemption requests raised by the investors.

 The fund/portfolio manager will keep buying or selling particular stocks to take advantage of changes in a dynamic market.

The expense ratio of equity funds changes due to regular buying and selling of equity shares. The current upper limit of the expense ratio is at 2.25% fixed by SEBI for equity funds and they plan to further reduce it. An investor will always look for the equity fund that has low cost as measured by expense ratio, lack of sales overload and has little or no turnover in the underlying portfolio.

WHO SHOULD INVEST IN EQUITY FUNDS?

An important decision that each investor needs to be crystal clear is that to invest in equity mutual fund or stocks direct.

This decision is to be guided by risk appetite along with the length and breadth of your investment portfolio. Ideally speaking, any investor who isn’t looking for relatively short-term isn’t suited for equity mutual fund. Equity mutual fund benefits the most for those who can stay invested for 5 plus years or more.

Another way to decide is by rupee cost averaging into a low-cost equity fund over long periods of time, reinvesting of dividends and then regularly going through up and down of stock market until one retires.

As a salaried employee, one can save tax under Section 80 C of Income Tax Act by investing in ELSS, which are regarded as the most appropriate because of the shortest lock-in period of 3 years and provides higher returns.

If you are starting fresh in the stock market, large-cap equity funds are an appropriate choice since these funds invest in equity shares of the top 100 companies of the stock market and provide stable returns in the long term.

As an experienced investor, you may look at investing in different equity funds who invest in shares of companies across market capitalisation which provide a combination of high return and less risk, as compared to equity funds who invest only in small cap or mid-caps.

BENEFITS OF INVESTING IN EQUITY FUNDS

·         Expert Money Management

·          Low Cost

·          Convenience

·          Diversification

·          Systematic investments

·          Flexibility

·         Liquidity

·          Tax

One of the huge benefits of investing in equity funds is one doesn’t need to worry about choosing the right stock and sectors to invest which, of course, requires a lot of research and study of company financials. On an average, the performance of equity funds in India have generated pre-tax returns in the range of 10 to 12 % which fluctuates as per the economic and market dynamic changes.

Do remember the golden rule that those who have the gold will make the rules and hence, choose wisely to dig your gold on equity mutual funds.