What are Mutual Funds and How Do They Work?
These days, mutual funds are one of the most popular investment options. A mutual fund is a type of investment scheme.
It is created when an asset management company (AMC) or fund house collects assets from a number of individual and institutional investors that have similar financial goals.
The pooled investment is managed by a fund manager, who is a finance professional. The fund manager makes stock and bond transactions that are in compliance with the investment mandate.
Individual investors can get exposure to a professionally managed portfolio by investing in mutual funds. You can also diversify your portfolio by investing in mutual funds, which have a diverse asset allocation.
Investors would be assigned fund units based on their investment amount. As a result, each investor will make or lose money in direct proportion to the amount they invest.
The fund manager's primary goal is to maximise returns for investors by investing in assets that are associated with the fund's aims. Mutual fund performance is determined by the underlying assets.
Top-Rated Equity Funds
An equity fund is a type of mutual fund that primarily invests in equities shares. To put it another way, equity funds are similar to publicly listed stock market securities. These funds are preferred for long-term investment.
As of December 2018, the total investment in equity funds had surpassed Rs. 8 lakh crore, according to the apex mutual fund body,
Association of Mutual Funds in India (AMF). The reason for their increasing popularity is because, over time, the top-performing equity funds often give significantly better returns than debt funds or even fixed deposits.
Market capitalization, investing approach, tax treatment, geographical characteristics, management style, and growth potential all influence the types of equity funds available.
Some of the best equity mutual funds are sector-specific investments, known as sectoral funds.
Top 10 Equity Mutual Fund
S. | Mutual Fund | Category/Risk | 1st Year | 3rd Year | 5th Year | Rating |
1. | Equity/High | 44.62% | 118.77% | 169.94% | 5* | |
2. | Equity/High | 39.12% | 102.24% | 123.29% | 5* | |
3. | Equity/High | 35.65% | 91.01% | 114.07% | 5* | |
4. | Equity/High | 37.07% | 98.74% | 110.20% | 5* | |
5. | Equity/High | 19.50% | 72.19% | 95.71% | 5* | |
6. | Equity/High | 32.78% | 76.99% | 97.68% | 5* | |
7. | Equity/High | 25.47% | 63.91% | 84.96% | 5* | |
8. | Equity/High | 25.49% | 66.74% | 90.47% | 5* | |
9. | Equity/High | 26.49% | 63.65% | 83.88% | 5* | |
10. | Equity/High | 24.74% | 60.83% | 85.73% | 5* |
Characteristics of Equity Funds
The basic goal of investing in equity funds, like all other investments, is to create a huge return.
These funds achieve this goal by investing 65 percent of their assets in listed company equity shares. It complies with SEBI's investment guidelines. The remaining 35% of assets is generally invested in debt instruments.
Taxability
Dividends and capital gains are the two types of earnings available to investors through equity funds. The Asset Management Company (AMC) clears the Dividend Distribution Tax (DDT) on dividends, and investors must pay any other taxes on those returns.
Capital gains are taxable, but only in portion. Long-Term Capital Gain (LTCG) on an Equity-Linked Savings Scheme (ELSS) has tax advantages.
LTCG is tax-free up to Rs 1 lakh. Anything exceeding that is subject to a 10% tax rate under section 80C of the Income Tax Act.
It's important to note that ELSS has a three-year lock-in period, which means you won't be able to withdraw your money before that period.
Major Advantages
We can filter down the best-performing equities funds that you can invest in via SIP based on past performance. Investing in such funds has a number of advantages. Some of them are mentioned below.
- The majority of equity funds are managed by Asset Management Companies, which are professional fund management firms (AMC).
- These asset management companies conduct research, analysis, and investments on behalf of their customers. They have access to industry information that an individual investor would not have.
- If you invest in the top equity mutual funds, the risk factor is significantly reduced. AMCs keep track of a variety of risk factors, including as concentration, fluctuation, and liquidity, and invest money based on the research.
- The smaller ticket size assures that this type of investment does not put an investor beyond their monetary capacity. In India, you can start a systematic investment plan (SIP) in the top equity mutual funds for less than Rs. 500. The SEBI closely monitors these mutual funds, ensuring unparalleled transparency in all transactions. On their websites, all funds are required to post their daily NAV and monthly portfolios.
- The huge quantity of equity funds available provides investors with a wide range of options. There are now approximately 9,500 equity mutual funds available as of 2018. Over a three-year period, the best of these funds had gained more than 25%.
- The tax advantages of ELSS funds are not available with other types of investments. These investments can help investors save up to Rs. 1 lakh in taxation. Capital losses on one stock scheme can be offset by capital gains on another equity scheme in the same financial year. This option isn't available in any other investment plan.